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RNS Number : 9958C
Ethernity Networks Ltd
24 June 2021
The following announcement corrects the enquiries/contact
information set out in the Company's announcement released today at
7:00 am under RNS No. 9702C. All other details remain unchanged.
The full amended text is shown below.
24 June 2021
Ethernity Networks Ltd.
(Ethernity or the "Company")
Results for the Year Ended 31 December 2020 and Notice of Annual
General Meeting
Ethernity Networks Ltd (AIM: ENET.L), a leading supplier of
networking processing technology ported on FPGA (field programmable
gate array) for virtualised networking appliances , today announces
its results for the year ended 31 December 2020.
Financial Highlights
- Revenues increased by 38.0% to $1.85m (2019: 19.6% to $1.34m)
- Gross margins increased by 37.5% to $1.58m (2019: 41.6% to $1.15m)
- Gross Margin remained constant at 85.4% (2019 85.6%)
- Operating costs before amortisation of intangible assets,
depreciation charges, provisions and other non-operational charges
decreased by 23.0% to $5.27m (2019: 14.1% to $6.85m)
- EBITDA loss (adjusted in 2019 for R&D capitalisation)
reduced by 34.2% to a loss of $3.72m (2019: $3.47m before
additional capitalised R&D costs)
- Cash funds raised during the year of $3.29m
Operational 2020 and Post-period highlights
Operational Highlights
- Ethernity and TietoEVRY joint offering in February 2020, to
boost 5G performance with UPF/VPP acceleration
- Further progress for the Company's 5G UPF offering in China with additional engagements
- New design contract for Ethernity flow processor technology
with a North American tier-1 telecom OEM signed in April 2020
- New contract in August 2020 with existing OEM customer, based
in St Petersburg, to upgrade an existing hardware platform with new
FPGA-firmware
- In September 2020, signed a contract to provide an Indian telecom OEM with end-to-end system functionality including Hardware design, delivery of Cell Site Router Data plane on FPGA SoC, and complete Router Software Stack for 60Gbps and 360Gbps appliance platforms
- Order from new tier-1 North American aerospace OEM customer in
November 2020 to provide ENET's Avionic Ethernet Switch firmware
and software, integrated into Ethernity's (UEP) device
- Recognized as a vendor to watch in Gartner Market Trends
Post-period Highlights
- Subject to accounting and revenue recognition, revenue for
first Half of 2021, is expected to be approximately $1m, 2.5 times
higher than revenue in H1 20.
- Exercise and close of Warrants from the July 2020 placing
- Total funds raised by the Company from July 2020 to date, from
the placing, warrants and the Share Subscription Agreement of
GBP5.4m ($7.3m)
- Significant interest from operators, server vendors and
integrators in Ethernity's DU NIC, which embeds vRouter data plane
offload that can be equipped with our own or Third party vRouter
software stack, as a result of which we shipped an early version of
our ACE-NIC to Tier-1 server vendors, adapted to support Fronthaul
and Midhaul requirements within the DU. Progressing towards trials
during H2 21, with vendors anticipating deployment in 2022
- In recognition of the innovative vRouter offering for DU, in
May 2021, Ethernity's 5G DU Aggregation and vRouting on FPGA
SmartNIC solution was shortlisted for a prestigious 2021 Global
Mobile ("GLOMO") Award
- Production orders received for the Company's ENET Flow
Processor FPGA systems-on-chip (SoCs) from an American wireless
broadband solution manufacturer, for deployment by the customer of
their product into the market. Total of $2m in orders received from
the customer for 2021/2022
- New Patent granted in March 2021 that enables Ethernity to
overcome operator issues with wireless transmission that are
interrupted or slowed due to inclement weather.
- Following receipt of the Patent, the Company has introduced
the the UEP-20 based bonding solution and went through different
testing and interoperability with radio equipment vendors.
Dependent on the vendors' success in selling their radio equipment
with our UEP-20 bonding solution for currently deployed radio
installations, we expect to obtain orders for current UEP-20 to
connect thousands of links in the range of $800k to $1M in the next
12 months.
- Furthermore, the Company is in commercial closing legal
discussions with a customer on a $930,000 contract for a customised
UEP-60 solution, the majority of which will be recognised in 2022.
Based on the customers estimates of deployment, this contract could
generate annual revenues of up to $3.0m from 2022 onwards. The
total UEP-20 and customised UEP-60 with bonding function revenue
for 2022 is estimated at $2.5m.
- With the residual COVID-19 disruptions worldwide and the
current exponential outbreak of COVID-19 in India and Taiwan, there
remains elements of uncertainty over the timing of near-term events
due to the challenges faced by our customers regarding both timing
of component supply and the meeting of their own plans. This may
result in the Company encountering customer driven delays in
deliverables dates and revenue recognition during the 2021 which
could subsequently result in the deferral of revenues from 2021 to
2022
David Levi, Chief Executive, said " I am encouraged by our
progress to date on the execution of our strategy for delivering
functional acceleration coupled with virtual software appliances,
and by the fact that finally the telecom cloud and NFV market has
been realised and is now positioning towards mass deployment,
allowing the Company to fulfil its goals. I am hopeful that the
growing momentum around our 5G UPF, 5G DU and UEP based wireless
backhaul Networking unit with an integrated bonding solution, will
lead to the realisation of large scale growth in the coming
years"
Annual Report and Notice of AGM
The annual report and accounts for the year ended 31 December
2020 is being posted to shareholders shortly and is available on
the Company's website at www.ethernitynet.com . The notice of
annual general meeting, to be held at 9.00 a.m. UK time (11.00 a.m.
Israel time) on 2 August 2021, will be despatched in due course and
made available on the Company's website.
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 Joint Broker) Tel: +44 207 614 5900
Richard Johnson / Oscair McGrath
Peterhouse Capital Limited (Joint Broker) Tel: +44 20 3005 5000
Lucy Williams / Duncan Vasey / Eran Zucker
About Ethernity ( www.ethernitynet.com )
Ethernity Networks (AIM: ENET.L) provides innovative,
comprehensive networking and security solutions on programmable
hardware for accelerating telco/cloud networks. Ethernity's FPGA
logic offers complete Carrier Ethernet Switch Router data plane
processing and control software with a rich set of networking
features, robust security, and a wide range of virtual function
accelerations to optimize telecommunications networks. Ethernity's
complete solutions quickly adapt to customers' changing needs,
improving time-to-market and facilitating the deployment of 5G,
edge computing, and NFV.
The information contained within this announcement is deemed by
the Company to constitute inside information stipulated under the
Market Abuse Regulation (EU) No. 596/2014. Upon the publication of
this announcement via a Regulatory Information Service, this inside
information is now considered to be in the public domain.
Chairman's Statement
It gives me great pleasure to present this, my first Chairman's
report since my appointment as Chairman of the Board on 10 March
2021.
At the outset, I see my role as Chairman as not only ensuring
that the formalities of board procedure, governance and
independence are maintained. I am here to stand with and behind the
Board and to mentor management in areas of executing the strategy
and plans of the Company drawing on my years of industry and board
leadership experience.
Since my appointment as Chairman, I have spent considerable time
with the CEO David Levi and members of the Board and management so
as to fully appreciate the Company strategy. I firmly believe that
the direction of diversifying the Company's offering to include
systems and solutions in addition to IP licensing and services is
the correct strategy and this has been proven in the
accomplishments and engagements attained over the past year. The
continued level of engagement with more significant market players
as well as progress being made to date is proof to me that the
strategic direction of the Company is the right one and carries my
full support.
We are progressing in achieving the desired mix of revenue
streams from network solutions in addition to IP licenses and
services. With the existing technology and resources available in
the Company and the immense opportunities in the market for 5G
deployment, I am comfortable that with the plan built and strategy
in place the Company will be able to achieve its objectives of
becoming a provider of advanced network solutions.
Having reviewed the past year, Ethernity has continued to
develop its technology so as to become a provider of advanced
network solutions to the market. In H1 2020, the Company
experienced some delays in signing new contracts due to the
COVID-19 situation yet managed to perform to expectations. It was
anticipated that H2 2020 financial year would show a significant
increase over H1 and the Company succeeded to recover and grow its
revenue by approximately four times over H1 2020, increasing
revenues from H1 of $359,375 to a FY 2020 revenue of $1,853,732 (FY
2019 $1,343,844) for the full year.
The Company has continued to test and develop its product both
with OEMs and end-users including national telecoms operators.
These initial testing phases have progressed well and the Company
now anticipates that these will lead to larger scale field trials
prior to eventual commercial deployments. Furthermore, there has
been significant progress toward the implementation of OpenRAN,
along with the continued anticipated demand for FPGA-based
virtualised routing and other telecom applications. We are excited
by the progress we have achieved and the inroads we are making
toward meeting the Company's growth ambitions. We believe that with
our available technology and by integrating additional
functionality on our existing DU implementation that will result in
additional savings for the telecom operators, we will maintain our
edge over the other solution providers in this market.
Revenues for 2020 were $1.85m (2019 $1.34m) with a gross margin
of $1.58m (2019 $1.15m) and an operating loss of $5.09m (2019
operating loss $6.74m before capitalisation of costs to Intangible
Assets) respectively. This is further expanded upon in the
Financial Report section of this Annual Report. The Company
continues to invest significantly in planned Research and
Development.
Fundraising
During the year under review the Company announced that it would
need to raise additional funds so as to meet the Company's
operational and development goals. These efforts were successfully
achieved during the second half of the year, with funds raised via
a placing in July 2020 which included the issue of warrants, the
exercise and completion of which at almost 100% was concluded in
May 2021. Furthermore, the Company successfully concluded a Share
Subscription Agreement with the 5G Innovation Leaders Fund LLC ("5G
Fund"), a U.S.-based specialist investor, in relation to the issue
of new ordinary NIS 0.001 shares ("Shares"), to raise up to
GBP3.2m.
The July 2020 placing raised GBP2.66m, inclusive of warrants
which closed on 12 May 2021, and which included GBP0.62m from the
Executive Directors. As of the date of this report, the Company has
received via the Share Subscription Agreement GBP2.45m of the
GBP3.2m as well as a further GBP0.26m against the initial allotment
shares, being a total of GBP2.71m.
These fundraising efforts have significantly strengthened the
financial position of the Company and leaves the Company
well-resourced to meet its operational and development goals.
At the Annual General Meeting held on 14 September 2020,
resolutions were approved, inter alia, granting the Directors share
issuance authorities in line with other growth companies on the AIM
market to provide the Company with greater flexibility and funding
options.
COVID-19
The Company had previously stated that in light of the continued
uncertainty on the potential impact and duration of the COVID-19
pandemic, the Board had taken certain steps to both safeguard the
well-being of staff and to position the Company for the future.
These steps were successfully undertaken, and the Company managed
to maintain its operational capacity and deliverables during the
extremely difficult time the world endured due to COVID-19. I am
pleased to report that due to the exceptional efforts of both the
Israeli government and the population in general, the country has
all but overcome the pandemic inside of its borders and the Company
managed to continue meeting its deliverables within the constraints
of its customers.
Thanks
The Board is very appreciative of the considerable efforts of
the CEO, the CFO, the VP R&D and all our management and staff,
who work tirelessly towards the development, sales, and
administrative goals of the Company. I thank them especially during
these testing times for their continuing hard work and commitment
to the Company.
I would further like to thank the Board for the opportunity to
Chair the Company and compliment the executive management on their
tireless efforts in securing the financial future and growth of the
Company during a very difficult and trying 2020.
Outlook
The current year will be both challenging and exciting as the
Company continues to increase and capitalise on customer
engagements, continues to develop and deliver its strategy as well
as face the particular challenges, including the COVID-19 pandemic
in India and the shortage of components, to grow the revenue
delivery from current modest levels, into milestone new contracts.
The Board is confident that, providing customers maintain their
technology investment programs, progress will continue to be made
this year resulting in longer term value for shareholders.
Yosi Albagli
Chairman
24 June 2021
Chief Executive's Statement
Business and Market Overview
Ethernity Networks continues to operate in a market which is
undergoing significant change. This includes the growing use of
FPGA devices for networking appliances and the transition to
disaggregated 5G and Open RAN networks which will provide higher
data throughput and will utilise Cloud Native Architecture based on
computer Servers and Virtualised Software. The Company's
disaggregated FPGA-based products and innovative IP coupled with
software appliances covers the Open RAN space from tower to core.
These will all contribute to the Company to positioning itself as a
key player in this market.
While during H1 2020 we continued our 5G UPF engagement with
various partners, operators and OEMs we experienced a challenging
period, as due to COVID-19 our planned fund raise in Q1 was
delayed. Furthermore customers delays in their procurement and
project plans resulted in a need for a fundraise which was
completed in July 2020 with significant support from the Company's
Directors. This, together with a Share Subscription Agreement with
5G Innovation Leaders Fund LLC (5G Fund) in September and the
additional warrants from the July placement resulted in a
significant boost to the Company's cash reserves, ending the 2020
year with sufficient cash reserves for 2021. Subsequently during H1
21 additional funds were received from both the warrants relating
to the July placement and the share Subscription facility to
further support our growth plan.
Subsequent to the delays experienced in H1 20, we recovered well
during second half of 2020 and grew the revenue by approximately
four times over H1 20 and over the same period in 2019. A notable
contract during H2 was a contract with an Indian OEM that licensed
our UEP-60 (60Gbps) and UEP-300 (300Gbps) design including hardware
design, the ENET Flow Processor FPGA firmware and Routing Software
Stack for 60Gbps and 300Gbs Cell Site Router. Upon deployment of
the products this will further result in recurring revenues from
both FPGA SoC and the software, however with the current COVID-19
situation in India we anticipate a number of months delay in the
fabrication of the licenses based products. The Company will
propose the UEP-60 and the UEP-300 as customised version to global
vendors which is planned to serve as one of our growth engines over
the forthcoming years, to be positioned as differentiated Cell Site
Gateway with various FPGA loads for Fronthaul, Midhaul (CU to DU)
and Backhaul (bonding).
UPF is the User Plane Functions element on the 5G core, and this
market is classified as Virtual Evolve Packet Core (vEPC) that
combines control software and data plane handling, where data plane
handling is managed by the UPF element . The global virtualised
Evolved Packet Core (vEPC) market is priced on a per subscriber
licenses/service and therefore is expected to grow from USD 3.9
billion in 2020 to USD 13.7 billion by 2026,
https://www.prnewswire.com/news-releases/global-virtualized-evolved-packet-core-vepc-market-2020-2027-us-market-is-estimated-at-1-2-billion-while-china-is-forecast-to-grow-at-44-1-cagr-301266800.html
Ethernity currently proposes its ACE-NIC100 as a functional
acceleration card for UPF software, however in collaboration with
TietoEVRY we plan to propose a joint offering that will include the
UPF software element that allows us to supply into a larger market
for Private 5G market and IoT.
During 2020 we continued our 5G UPF solution engagements with
operators, OEMs and partners based on the ACE-NIC100 Functional
Acceleration Card, and we are currently in progress towards field
trials for end of 2021 and plan for deployment during 2022. Our 5G
UPF offering employs the ACE-NIC100 to offload User Plane traffic
forwarding from the CPU resulting in reductions of latency, power
and cost.
Furthermore, in Q4 20 we introduced our DU NIC offering that
runs in complete R&D synergy to our activities related to the
Cell site router appliances (UEP-60 and UEP-300), that over and
above the Fronthaul aggregation and timing synchronisation
technology offers notable and innovative solution that can offload
vRouter functions from the server, reducing the need for external
Cell site Router, and allows the building of a complete Cloud
native offering. This offering was nominated as one of 4 nominees
at the 2021 GLOMO Awards (Global Mobile Awards) under the category
Best Mobile and Network Breakthrough product of the year on 24 May
2021. A recent report published and as highlighted in our Blog
https://ethernitynet.com/market-for-dus-in-openran/ calls for 1
million DUs in use by 2024 (excluding China), representing an
average 400,000 DUs per year during 2023/24. In this market
Ethernity is positioned as a differentiated and innovative offering
with integrated routing and security offload that utilises our
existing IP.
Resulting from the market's intentions for 5G NFV based
deployment and OpenRAN along with the Company's growing engagements
with server vendors, integrators, operators and OEMs for our
ACE-NIC family that embeds a Router-on-NIC implementation, the
Company has continued and is now focussing its efforts on the
ACE-NIC offering and other appliances based on the ACE-NIC, various
FPGA firmware and software stack, with the intention being to
capture a greater market share of the upcoming 5G market.
Current Trading
During H1 2021 our activities have progressed in multiple
domains:
-- Subject to accounting and revenue recognition, revenue for
first Half of 2021, is expected to be approximately $1m that is 2.5
times more than revenue in H1 2020.
-- With Xilinx who supply the FPGA device used by Ethernity
along with procurement from other sources, we have succeeded to
secure supply for the majority of FPGA's required for 2021 so as to
fulfill our FPGA SoC orders.
-- Following on from our market update of 2 December 2020, we
received a $400,000 order for our ENET FPGA SoC for Point to multi
point fixed wireless platforms. Further to this order the Company
has received further orders resulting in total orders received to
date of $2m, with $740,000 to be delivered during 2021 and the
balance of $1.26m in 2021. We are hopeful these orders will
increase with further engagements through the product deployment
and introduction.
-- UPF:
o Ethernity continues to progress on the collaboration with
TietoEVRY in bringing a joint UPF offering that includes a UPF
software and acceleration card as a complete UPF product to serve
the 5G Private Networks.
o Ethernity is currently engaged with an Asian service provider
that has completed integration of our ACE-NIC with their UPF data
plane and who now plans larger field trials during Q4 21 with
deployment expected during 2022.
o Chinese open UPF testing for private 5G market is planned for
Q4 21 through our OEM customers that integrated their UPF software
and the ACE-NIC100, with anticipated deployment during 2022.
-- Distribution Unit : Our DU NIC that embeds vRouter data plane
offload that can be equipped with our own routing software stack,
gained significant interest from operators, server vendors and
integrators and as a result we shipped an early version of our
ACE-NIC adapted to support Fronthaul and Midhaul requirements
within the DU, progressing towards trials during H2-21 who
anticipate deployment in 2022. Such recognition resulted in with
the understanding by the market that Ethernity provides an offering
for the Open RAN that will result in a seamless cloud native
deployment for Open RAN versus current offerings in the market that
are based on physical Cell Site Router
-- Virtual Router : The Company is collaborating with a Tier1
Networking vendor on a joint offering that will include their
well-known Cloud native virtual router software package and our
ACE-NIC100, that will offload the router data plane. Within the
framework of the collaboration, Ethernity will benefit from the
inclusion in their substantial market position that they hold with
system integrators and service providers.
-- The Company was granted a Patent for wireless bonding.
Practically, this patent enables Ethernity to overcome operator
issues with wireless transmission that are interrupted or slowed
due to inclement weather. The primary applications for this patent
are SD-WAN and wireless backhaul deployments.
-- Following the introduction of the UEP-20 based bonding
solution the Company went through different testing and
interoperability with radio equipment vendors, and dependent on the
vendors' success in selling their radio equipment with our UEP-20
bonding solution for currently deployed radio installations, we
expect to obtain orders for current UEP-20 to connect thousands of
links in the range of $800k to $1M in the next 12 months.
-- Furthermore the Company is in commercial closing legal
discussions with a customer on a $930,000 contract for a customised
UEP-60 solution, the majority of which will be recognised in 2022.
Based on the customers estimates of deployment, this contract could
generate annual revenues of up to $3.0m from 2022 onwards. The
total UEP-20 and customised UEP-60 with bonding function revenue
for 2022 is estimated at $2.5m.
-- We are also in discussions relating to various other UEP
customised offerings and further licensing for our Software and
firmware.
Outlook
As detailed, NFV deployment is now here to stay and will become
the norm as 5G networks will be based on NFV and virtualisation
technologies, with a need to support extensive performances. With
the new virtualisation concept that has finally been accepted and
adopted by the market, 5G will supply 10 times more in throughput
than 4G and alongside the virtualisation concept functionality
acceleration card as provided by Ethernity, this will be a key
element in the 5G network.
The Company revenue during 2021 and 2022 will be derived from
mixture of sales of FPGA SoC embedding our ENET flow processor
firmware, routing software stack, customised UEP offerings, and the
FPGA Smart NIC solution for UPF and DU, with anticipated contracts
during 2021, leading to confirmed orders for 2022.
Our DU and UEP offerings are offerings of combined hardware (or
FPGA Firmware) that will be equipped with our routing software
stack, of which the first version is schedule for release by Q3 21
followed by an advanced version planned for 2022. The Company
anticipates that as soon as the Company completes the development
of the routing software stack integration, orders for customised
UEP routing platforms together with vRouter offload and DU based
FPGA Smart NIC (ACE-NIC ) offerings for deployment into cloud
native environments, Open RAN and 5G core will increase in
exponentially.
With the disaggregation framework that is progressing within the
CSPs (Communications Service Provider), delivery to the CSPs will
be undertaken by system integrators such as TietoEVRY, server
manufacturers, the Company's OEM customers, or other channels that
will supply and support the deployment at the CSP. The Company does
not plan to sell its products directly to CSPs for large scale
deployment and intends to deliver to the market through the above
channels.
I am encouraged by the fact that finally the telecom cloud and
NFV market has been realised and is now positioning towards mass
deployment, allowing the Company to fulfil its goal. I am hopeful
that the growing momentum around our 5G UPF, 5G DU, UEP based
wireless backhaul networking unit with an integrated bonding
solution will lead to the realisation of large scale growth in the
coming years.
Considering the worldwide components shortage issue that albeit
has been currently resolved for the Company, along with the
residual COVID-19 disruptions worldwide and the current exponential
outbreak of COVID-19 in India and Taiwan, there remains elements of
uncertainty over the timing of near-term events due to the
challenges faced by our customers regarding both timing of
component supply and the meeting of their own plans. We recognise
that this may result in the Company encountering customer driven
delays in deliverables dates and revenue recognition during 2021
which could subsequently result in the deferral of revenues from
2021 to 2022. However, this is not expected to affect our
high-level growth plans and further investment in R&D.
Furthermore as highlighted above we anticipate securing orders for
2022, and along with the 2021 carry over, will result in achieving
the planned growth for 2022 from the current existing customer base
and that the market evolution, uptake and deployments as have been
long anticipated will now be realised from the latter half of this
year and the long anticipated and expected growth will now come to
fruition.
David Levi
Chief Executive Officer
24 June 2021
Strategic Review
The industry's 5G mobile network deployment plans for 2021 is
constructed using the underlying principles of Network Function
Virtualisation (NFV), Software Defined Networks (SDN) and Edge
Computing resulting in 5G ultimately being a flexible,
programmable, and distributed cloud network.
We live in an age of massive demand for data. Today's devices
and associated applications, whether streaming media, online
gaming, online storage for data backup, remote surgery, or
artificial intelligence demand far greater throughput than today's
networks can provide, and they also require that the data be served
with high availability, security, and reliability. To meet the
ever-increasing application needs, operators have begun using Edge
Computing to locate the content closer to the end users and
performing faster security authorisations with SDN/NFV technology
that, when coupled with infrastructure improvements, allows
delivery of 10 to 100 times more throughput.
NFV is part of a larger trend known as disaggregation, which has
enabled the industry to move toward agile networks. Whereas once
the standard was for networks to rely on ASIC (application-specific
integrated circuit) based monolithic hardware appliances that
bundled proprietary software into a vendor-locked device and
integrated only with other offerings from that vendor,
disaggregation has changed the paradigm to overcome such
limitations.
Thanks to the use of X86 as a standard platform for server
hardware, today's networks can disaggregate software applications
from the underlying hardware bare metal server. Software-based
functions run on top of CPUs inside standard servers from any of
several different vendors, and open stacks that are used to
communicate between virtual machines for application and service
chaining dictate the overall appliance functionality that runs on
the server.
Disaggregation within the data centre provides the flexibility
to choose a software vendor separately from the choice of a
hardware server platform, moving the industry away from monolithic
ASIC-based appliances. It ensures that the resulting appliance is
futureproof because the software can be upgraded or replaced
without needing to replace the hardware that hosts it.
FPGAs are the natural hardware solution for NFV, as they are
flexible, quick to market, efficient, scalable, and comes with
different size options to serve different markets and solutions.
FPGA platforms are being widely deployed in automotive, aerospace,
industrial, storage, and networking systems.
Gartner's February 2020 research report entitled "Market Trends:
Function Accelerator Cards Disrupting Traditional Ethernet Adapter
Market" defines Function Accelerator Cards (FACs) as "a class of
network interface hardware that help improve and accelerate server
availability, bandwidth performance and data transport efficiency
in a network, besides enabling connectivity to a network. While all
FACs are essentially NICs, not all NICs are FACs." The report also
defines the size of the market, by claiming that "by 2023, we
estimate that one in three NICs (network interface cards) shipped
will be a FAC," and further adds that "as 5G adoption also starts
to grow, FACs will also be handy at the edge for offloading NFV
functions. Product leaders at semiconductor providers must,
therefore, optimise their NIC hardware for capabilities to support
such use cases and redraw their product roadmaps for traditional
NICs to include FAC functionalities."
Ethernity's FAC delivers the FPGA SmartNIC hardware, the
functional acceleration FPGA firmware code, DPDK APIs to allow
connectivity to any virtual network function (VNF) for
acceleration, and control software supporting the majority of
today's L2/L3 network control protocols operating seamlessly on top
of the FPGA data plane code.
FPGA SmartNICs are often considered as high-end and expensive
compared to SmartNICs that are based on multicore programmable
ASICs, but Ethernity's approach to the SmartNIC market enables the
use of FPGA SmartNICs at the same price point of ASIC-based
multicore devices such as those offered by Mellanox and Broadcom.
The goal is to change the paradigm and to allow FPGA SmartNICs to
capture larger market share compared to ASIC-based SmartNIC
offerings.
While there are other FPGA SmartNIC providers, most only provide
the physical hardware FPGA card coupled with a piece of FPGA
reference design code. Others provide solutions specifically for
data centres, focusing on flow classification and load balancing.
Ethernity is actually the only vendor today that provides a
complete network processing for implementation of router and
security engine on FPGA (versus an ASIC offering), as well as
offering a complete Router-on-NIC for FPGA SmartNIC that can
operate with control software. Such an offering is uniquely
positioned far beyond the functionality provided by general-purpose
multicore programmable ASIC-based SmartNICs by providing complete
router data plane functionality coupled with other unique data
processing elements on top of the general SmartNIC functions.
Ethernity's 5G offering.
The Networking and security FPGA IP that the Company holds well
serves the entire 5G network from the tower to the core of the
network, including offerings for different gateway appliances
together with offerings for DU, CU and UPF as highlighted in the
diagram below.
The depth of Ethernity's IP for the 5G market presents an
outstanding technology offering for the 5G User data traffic
processing, allowing the Company to provide solutions for special
deployment scenarios that will result in significant added value
for the service provider.
Following the execution of the UPF offering the Company
progressed with an offering for a 5G Distribution Unit (DU) in
conjunction with the UEP based offering for customised Cell Site
Router
The UPF and CU Smart NIC offering can operate well in
conjunction with FPGA offering, however the standard DU NIC
business is served by different semiconductor company offerings
such as Intel, NVIDIA and others, as currently the OpenRAN service
providers it represents provides a large enough volume business for
ASICs. ASIC based NIC cards are offered by the said semiconductors
vendors or vendors that manufacture NIC cards based on the said
ASICs. To cope with the limited functionality offered on off the
shelf ASICs, Ethernity positioned its DU FPGA NIC offering as a
differentiated offering, through the introduction of the embedded
router data plane to offload vRouter and distributed CU security
offload, together with the other features that are included on
standard ASICs, allowing us to serve this large market with a
differentiated offering and higher margin based FPGA. In addition,
our Sync and timing Technology today offers superior performance
versus that which is proposed by the standard ASIC based offering.
The result is that we may also see business opportunities for our
DU NIC card without routing. For this such configuration offering
we intend on collaborating with the FPGA vendors in a joint
go-to-market plan which will allow us to meet the target price
versus cheaper ASIC offerings, but with excellence of DU offload
and the Sync/timing solution.
The DU market will be served by Ethernity in one or all of the
following business models:
1. Sell the Company's proprietary ACE-NIC FPGA NIC hardware (and
future generations), that will embed the Company's IP and software
stack, which may result in the Company requiring additional working
capital to fund the manufacturing process for large volumes.
2. For high volume NIC deployments such as DU market as
indicated above, the Company will seek to build a disaggregate
business where hardware will be delivered directly to the customer
through a 3(rd) party FPGA vendor and the Company will sell the
software, allowing reduced costs for the customer and the ability
to propose a joint competitive offering to the customer.
3. Subsequent to obtaining a large enough market share, given
that the Company holds a complete ownership over the code running
on the FPGA without any dependency on 3(rd) parties, the Company
may consider converting the FPGA design to an ASIC with the
intention of entering and capturing a larger market segment at
higher margins.
In summary the unique positioning of Ethernity Networks as a
leading innovator of software-defined network processing and
security solutions on programmable hardware, that will include a
complete Virtual Networking Function software control stack, will
uniquely position the Company to serve the network disaggregation
market. This will be achieved due to offering accelerated
performance software based solutions for the server, utilising our
UEP and FPGA NIC as the hardware platform for the innovative
software and firmware solution.
With this strategy, the progress achieved to date together with
the recent increases in customer interest in and acceptance of our
complete UPF, DU equipped with vRouter Offload and our Router
software stack, I firmly believe that the direction undertaken of
diversifying the Company's offerings to include systems and
solutions in addition to IP licensing and services is the correct
strategy, and this has been proven in the accomplishments and
engagements achieved during the past year.
Financial Review
Financial Performance
Through the past financial year we continued with our goals and
to progress our transition towards diversifying the Company's
offerings to include systems and solutions in addition to IP
licensing and services as the correct strategy and this has been
proven in the accomplishments and engagements attained over the
past year.
Obviously, as with most companies worldwide, the onset of the
COVID-19 pandemic created a new set of challenges, not only within
the management of the Company, but in aligning ourselves with the
issues within the markets in which we operate and our customers
goals. I am pleased to report that the Company managed to achieve
its expectations and weather the Covid storm albeit contracts were
delayed or put on hold by customers. Fortunately in Israel due to
the quick government and social reaction we managed to focus on our
projects with minimal upheaval, both to our operational
capabilities and remaining deliverables.
The Company reported on 26 June 2020 that in light of the change
in status of various engagements and funding expectations, the
Company would need to secure additional short-term funding in the
latter half of H2 2020 either via short term finance arrangements
or an additional issue of equity. Subsequent to this we
successfully raised funding through a placing, including warrants,
and the entering into a Share Subscription Agreement with the 5G
Innovation Leaders Fund LLC to raise up to GBP3.2m. The effect of
these financial transactions are further addressed under the
"Balance Sheet" section within this review below.
Highlights
-- Revenues increased by 38.0% to $1.85m (2019: 19.6% to $1.34m)
-- Gross margins increased by 37.5% to $1.58m (2019: 41.6% to $1.15m)
-- Gross Margin remained constant at 85.4% (2019 85.6%)
-- Operating costs before amortisation of intangible assets,
depreciation charges, provisions and other non-operational charges
decreased by 23.0% to $5.27m (2019: 14.1% to $6.85m)
-- EBITDA Loss (adjusted in 2019 for R&D capitalisation)
reduced by 34.2% to a loss of $3.72m (2019: $3.47m before
additional capitalised R&D costs)
-- Cash funds raised during the year of $3.3m
Key financial results
Recognition of Research and Development Costs.
In line with the change in policy adopted by the Company from 1
July 2019 the Company has continued the policy of no longer
continuing recognising the costs as an intangible asset but rather
recognising these as an expense and charged against income in the
year incurred. The Company may at some future point once again
elect to recognise the Research and Development costs as an
intangible asset in terms of the principles outlined under IAS
38.
Furthermore, as reported in 2019, an independent Fair Value
report was commissioned by the management to support the management
assertion that the underlying value of the intangible asset
exceeded the carrying value on the balance sheet. This was
undertaken by Somekh Chaikin KPMG (an Israeli member firm of the
KPMG network of independent member firms affiliated with KPMG
International Cooperative) and the report concluded and supported
the management assertion that no impairment of the intangible asset
on the Balance Sheet is required, which assertion the management
continue to support.
EBITDA
EBITDA, albeit it not a recognised reportable accounting
measure, provides a meaningful insight into the operations of a
Company when removing the non-cash or intangible asset elements
from trading results along with recognising actual costs versus
some IFRS adjustments, in this case being the amortisation and
non-cash items charges in operating income and the effects of IFRS
16 treatment of operational leases.
The EBITDA for the year under review for the financial year
ended 31 December 2020 would be presented as follows:
US Dollar
For the year ended
31 December
--------------------------
2020 2019
Revenues 1,853,732 1,343,844
Gross Margin as presented 1,582,279 1,150,832
------------ ------------
Gross Margin % 85.36% 85.64%
Operating (Loss) Profit as presented (5,088,929) (4,542,773)
Add R&D Expenses taken to Intangible
Asset 2019 (2,193,408)
------------ ------------
Adjusted Operating Loss (5,088,929) (6,736,181)
Adjusted for:
Add back Amortisation of Intangible
Assets 952,606 743,752
Add back Share based compensation
charges 18,209 69,654
Add back vacation accrual charges 81,732 (14,454)
Add back depreciation charges on
fixed assets 156,011 151,977
Add IFRS operating leases depreciation 155,862 122,729
---------------------------------------- ------------ ------------
EBITDA (3,724,509) (5,662,523)
------------ ------------
The EBITDA losses reduced significantly during the 2020 year.
The R&D operational costs component in 2019 was $2,855,896
after taking into account the half year capitalisation of
$2,193,408 to the Intangible Asset. When removing the effect of
this amount in 2019, the R&D operating costs would have been
$5,049,308 as compared to $4,037,904 for 2020. Removing the
amortisation of the Intangible Asset, these costs would have been
$4,314,552 in 2019 and $3,085,298 in 2020. This is indicated in the
improvement in cash based operational costs within the operations
of the Company, which included the prompt cash conservation
measures taken by management in early 2020 in response to the
COVID-19 pandemic outbreak.
These EBITDA losses will continue to decrease as the future
revenues increase, albeit there are anticipated increases in both
R&D resource costs and the renewal of marketing activities that
were halted due to COVID-19 and the ban on international
travel.
Summarised trading results
US Dollar
Audited
------------------------
For the year ended
31 December
------------------------
2020 2019
----------- -----------
Revenues 1,853,732 1,343,844
----------- -----------
Gross Margin 1,582,279 1,150,832
----------- -----------
Gross Margin % 85.36% 85.64%
----------- -----------
Operating (Loss) Profit -5,088,929 -4,542,773
----------- -----------
Financing costs -1,462,740 -93,584
----------- -----------
Financing income (expenses) 298,016 88,325
----------- -----------
(Loss) Profit before tax -6,253,653 -4,548,032
----------- -----------
Tax benefit (reversal of previous
deferred tax benefit) -613,228
----------- -----------
Net comprehensive (loss) income for
the year -6,253,653 -5,161,260
----------- -----------
Basic and Diluted earnings per ordinary
share -0.17 -0.16
----------- -----------
Weighted average number of ordinary
shares for basic earnings per share 36,590,988 32,556,686
----------- -----------
Revenue Analysis
Revenues for the twelve months ended 31 December 2020 increased
by 38.0% to $1.854m (2019: $1.344m). This result is a positive
reflection of the upward trend anticipated due to the increased
customer engagements.
The revenue mix will continue to evolve as the Company
progresses in achieving the desired mix of the revenue streams from
network solutions in addition to IP licenses and services.
Margins
Gross margins remained above the 60%-70% levels that the Company
models its forecasts on, with the 2020 gross margin being 85.4% as
compared to 85.6% in 2019. As always, the gross margin will vary
according to the revenue mix as Royalty and Design Win revenues
generally achieve an approximate 100% gross margin before any sales
commissions are accounted for.
As the revenue mix as noted above evolves, this will have a
downward pressure on gross margins as revenues from 100% margin
sources become less prominent in the mix, being replaced by cost
active product sales.
Operating Costs and Research & Development Costs
As noted above, during the latter half of 2019, the Company
revised its treatment of capitalising its Research and Development.
After adjusting for the capitalised Research and Development Costs
amortisation costs of the Development Intangible asset,
Depreciation and Share Based Compensation adjustments the resultant
increases (decreases) in Operating costs, as adjusted would have
been:
31 December 31 December Increase %
2020 2019 (Decrease)
US$ US$ US$
Research and Development Costs
including capitalised costs, net
of amortisation, Share Based Compensation
and Vacation accruals 3,049,659 4,289,690 (1,240,031) (28.91%)
------------ ------------ ------------ ---------
General and Administrative expenses,
net of depreciation, Share Based
Compensation, Vacation accruals,
impairments. 1,170,082 1,122,577 47,505 4.23%
------------ ------------ ------------ ---------
Marketing expenses, net of Share
Based Compensation and Vacation
accruals. 1,052,382 1,433,405 (381,023) (26.58%)
------------ ------------ ------------ ---------
Total 5,272,123 6,845,672 (1,573,549) (22.99%)
------------ ------------ ------------ ---------
Operating costs were in line with the Company targets and
expectations as planned with increases in General and
Administrative costs.
Research and Development costs before amounts charged to income
for the amortisation of the capitalised Research and Development
intangible asset, the overall comparable costs against 2019 reduced
significantly by $1,240,031. This reduction came from the payroll
reduction costs as a result of the COVID-19 measures put in place
by the Company.
The increase in General and Administrative costs over 2019
amounted to approximately 4.2% or $47,505. Overall there were
operational savings achieved of approximately $91,000, however
these savings were significantly offset due to the increased fees
incurred on the fundraising and investor relations costs, resulting
in a net increase of $47,505. By the very nature of expenditure
accounted for under the General and Administrative costs there was
very little scope for further savings due to the fixed nature of
such expenses.
Sales and Marketing costs declined significantly over the
previous year primarily due to the impact of COVID-19 on the
payroll and the cessation of almost all travel and marketing
events. The resulting effect of this was a reduction of payroll and
related costs of approximately $327,000 and reductions in travel
and conference costs of approximately $134,000. The total costs
reduced by 24.5% equating to a reduction of approximately $352,110
for the year as compared to the previous year.
Financing Costs
The significant increase in financing costs has come about due
to the two equity events referred to below and under the section "
Balance Sheet ".
It is to be noted that the two transactions entered into below,
albeit they were in essence based on raising funds via equity
issues, are nonstandard equity arrangements and have been dealt
with in terms of the guidance in IFRS9-Financial Instruments. This
guidance, which is significantly complex in its application, forces
the recognition of the fair value of the equity issues, and
essentially creating a recognition in differences between the
market price of the shares issued at time of issue versus the
actual price the equity is allotted at. It is this differential or
"derivative style instrument" that needs to be subject to a fair
value analysis, and the instruments, the values received and
outstanding values due being separated into equity, assets, finance
income and finance charges in terms of the IFRS-9 guidance.
Referring to the two fundraise deals the Company completed
during the year of 2020 being;
a. Issuance of the Share and Warrants bundle (Peterhouse Capital Limited)
b. Share Subscription Agreement (5G Innovation Leaders Fund)
It has been determined that in terms of IFRS-9, both
transactions are to be recognised as equity and a liability of the
Company and all adjustments to the liability value are to be
recognised through the Income Statement. In both cases the equity
differential based on allotment price and fair value at time of
allotment charges to the income statement.
The liability in respect of deal a. above represents the
outstanding 30p Warrants which had not been exercised as of 31
December 2020.
The liability in respect of deal b. represents the cash advances
the Company has received during 2020 and as of 31 December 2020
still has not allotted shares against the advances in settlement of
the debt.
The above outlined treatment results in a significant finance
expense charged to the Income Statement, however it should be noted
that the expense is not an actual cash expense, rather an expense
due to the accounting treatment and recognition of an expense
instead of an asset in terms of IFRS guidance.
The Finance income is the mirror image to the above and relates
to the 880,000 "Allotment Shares" the Company issued in advance as
part of the Share Subscription Agreement, the cash payment for
which the Company was due to receive at a date subsequent to the
actual allotment date of the shares, up to and including the final
date of the Agreement. The increase in value of the asset, being
the increase in the value of the Allotment Shares at the time of
allotment versus the value at 31 December 2020 is recognised as
finance income in the Income Statement.
The Financing Expenses and Finance Income in the Income
Statement are thus summarised as follows:
Financing expenses for the Year 2020
5G Innovation Leaders Fund
The Company has received two tranches in 2020 as part of the deal, GBP500K
(first tranche) and GBP400K (second tranche). The below expenses are
split between the two tranches as well as general expenses which relate
to the entire funding deal.
First Tranche $ 60,951 Face value premium of GBP47,000 for first tranche
(GBP500K).
----------- ------------------------------------------------------
$ 219,334 Upon share allotment of 1,184,834 shares, the
Company adjusted liability which was extinguished
to Fair Value right before allotment. The adjustment
portion is recognised as finance expenses.
----------- ------------------------------------------------------
$ 118,496 Upon share allotment of 826,087 shares, the Company
adjusted liability which was extinguished to
Fair Value right before allotment. The adjustment
portion is recognised as finance expenses.
----------- ------------------------------------------------------
$ 19,130 Remaining liability from first tranche as of
Year End has been adjusted to Fair Value, the
adjustment is recognised as finance expenses.
----------- ------------------------------------------------------
Second Tranche $ 51,911 Face value premium of GBP38,000 for second tranche
(GBP400K)
----------- ------------------------------------------------------
$ 78,308 Liability from second tranche as of Year End
has been adjusted to Fair Value, the adjustment
is recognised as finance expenses.
----------- ------------------------------------------------------
Entire Deal $ 23,292 Initial finance fees for entire deal of $90K
are being amortising throughout the entire deal
term. In 2020 the company expensed 25.88% of
the $90K Prepaid Finance Expenses to finance
expenses
----------- ------------------------------------------------------
Total 5G Fund $ 571,422
----------- ------------------------------------------------------
Peterhouse $ 8,386 Recording a portion of initial fundraise expenses
Capital (prorated a portion which relates to the Warrants
and not the shares, as those need to be recognised
in the Income Statement)
----------- ------------------------------------------------------
$ 576,068 The liability in respect of the 20p warrants
was adjusted to Fair Value right before the exercise
which took place in December 2020. This adjustment
portion is recognised as a finance expense.
----------- ------------------------------------------------------
$ 267,976 Revaluing 30p warrants liability as of 31 December
2020 to fair value. The adjustment is recorded
as finance expenses.
----------- ------------------------------------------------------
Total Peterhouse $ 852,430
----------- ------------------------------------------------------
Financing Income for the Year 2020
5G Innovation $ 105,400 Recording adjustment to cash due for 880,000
Leaders Fund shares, valued at 25.10p per share which is the
conversion price at Year End. Asset is worth
more at year end then it was on allotment, and
therefore the increase in value is recorded as
finance income
----------- ------------------------------------------------------
Operating Loss and Net Comprehensive Loss for the Year
After taking the above into account along with discontinuing the
capitalisation of Research and Development costs from 1 July 2019,
the Operating Loss for the year was in line with expectations, with
the operating loss in 2020 of $5,088,929 in comparison to the loss
of $4,542,773 in 2019 (2019 $6,736,181 before recognition of
R&D costs as an Intangible Asset).
Balance Sheet
Post the announcement of 26 June 2020 wherein the Company stated
that the Company will need to secure additional short term funding
in the latter half of H2 2020 either via short term finance
arrangements or an additional issue of equity, the Company
succeeded to raise funds via two equity deals, being:
-- In July 2020 a Placing and Subscription raising:
a. Placing and Subscription to raise GBP780,000 along with a
further GBP100,000 via a Broker Option through the issue of new
Ordinary Shares. This included strong support of Directors and
staff with participation for GBP240,000 in the Subscription,
and
b. Investors received warrants on a 1 for 1 basis, exercisable
at 20p and 30p.
-- On 25 September the Company entered into a Share Subscription
Agreement with 5G Innovation Leaders Fund LLC ("5G Fund"), a
U.S.-based specialist investor, in relation to the issue of new
ordinary NIS 0.001 shares ("Shares"), to raise up to
GBP3,200,000.
To date, the Company raised in total from the Placing and
Subscription in July GBP2,66m, all of which closed on 12 May 2021
from the initial issue of shares and the exercising of the related
Warrants, which included GBP616,667 from the Directors. As of the
date of this report, the Company has received via the 5G Fund
GBP2,450,000 of the GBP3,200,000 as well as a further GBP256,766
against the initial allotment shares, being a total of
GBP2,706,766.
These fundraising efforts have significantly strengthened the
financial position of the Company.
Summary of Fundraising
At year end, the resultant assets and liabilities relating to
these transactions are:
Asset as of 31 December 2020
5G Innovation $ 301,658 Recording Fair Values at Year-end for 880,000
Leaders Fund shares issued to 5G. Equity valued at 36.05p
market price. Cash due for shares, valued
at 25.10p per share which is the conversion
price at Year End.
-------------------- ----------- ---------------------------------------------------
$ 66,709 Initial finance fees for entire deal of $90K
are being amortising throughout the entire
deal term. In 2020 The company expensed 25.88%
of the $90K Prepaid Finance Expenses to finance
expenses, the remaining 74.12% is an asset
at Year end
-------------------- ----------- ---------------------------------------------------
$ 368,367
-------------------- ---------------------------------------------------
Liability as of 31 December 2020
--------------------------------------------------------------------------------------
5G Innovation $ 165,299 Liability to 5G represents the first tranche
Leaders Fund of GBP500K less the shares allotted against
it by year end. Liability has been revaluated
at Fair Value due to the difference between
market price and conversion price at Year
End.
-------------------- ----------- ---------------------------------------------------
$ 676,645 Liability to 5G represents the second tranche
of GBP400K, revaluated at fair value due
to the difference between market price and
conversion price at Year End.
-------------------- ----------- ---------------------------------------------------
$ 841,944
-------------------- ---------------------------------------------------
Peterhouse Capital $ 286,253 Represents liability of outstanding 30p Warrants
less cancelled Warrants. (Warrants were exercised
in 2021)
--------------------
The balance sheet quick and current ratios of the Company for
2020, excluding the "liabilities" relating to the Share
Subscription Agreement and Warrants, remain sound at 1.90 and 1.81
respectively (2019 1.88 and 1.81 respectively).
The net cash utilised and cash reserves are carefully monitored
by the Board, who continue to assess, that subject to action to
reduce and carefully manage cash, cash resources remain sufficient
to meet the current and future adjusted planned requirements. This
monitoring and ongoing evaluation was significantly prevalent
during the year under review due to the COVID-19 pandemic, whereby
the Company implemented immediate plans to reduce and manage cash
consumption during the year. Cash utilised in operating activities
for the year is $3,594,827 (2019 $3,330,637), the increase in
consumption being mainly related to the increase in trade
receivables. Gross cash reserves remained positive at $2,180,726
including financial instruments as of 31 December 2020, (2019
$3,670,745), which reserves had been substantially bolstered from a
low of $540,000 in June 2020 during the second half of 2020 due to
the equity transactions. The reserves were further bolstered during
the first half of 2021 due to further investments received from the
exercise of the 30p Warrants and Share Subscription Agreement
outlined earlier in this report. Cash reserves were in line with
forecast outcomes after taking into account the funds raised.
Short term borrowings of $411,726 (2019 $1,012,731) arose mainly
from trade financing facilities raised during 2020 via the
Company's bankers. This is a "rolling facility" and utilised by the
Company on specific customer transactions only.
The Intangible Asset on the Balance Sheet at a carrying value of
$7,385,560 (2019 $8,436,010) is a result of the Company having
adopted from 2015, the provisions of IAS38 relating to the
recognition of Development Expenses, which methodology as noted in
the 2019 Annual Report was ceased from 1 July 2019. The useful life
and the amortisation method of each of the intangible assets with
finite lives are reviewed at least at each financial year end. If
the expected useful life of an asset differs from the previous
estimate, the amortisation period is changed accordingly. Such
change is accounted for as a change in accounting estimate in
accordance with IAS 8. In 2019, the Company undertook a third party
assessment by Somekh Chaikin KPMG (an Israeli member firm of the
KPMG network of independent member firms affiliated with KPMG
International Cooperative) to assess the fair value of the
Intangible Asset. Management reviewed the fair value as of 31
December 2020 giving due consideration to the changes in the
business over the past 12 months, including inter-alia increased
activities, signed contracts, collaborations, the growing
acceptance of the Company in the markets in which it operates,
along with the increases in cash resources and anticipated future
revenues. Considering these factors and giving credence to both
IFRS guidance and IAS 36 management are in their view, satisfied
with the fair value of this Intangible Asset (approximately $27m -
see Note 9 of the 2019 Annual Financial Statements), and that the
fair value substantially exceeds the carrying value of the
Intangible Asset on the balance sheet, and there is no requirement
for any further impairments.
COVID-19 Impact and Going Concern
Currently, with the impact of COVID-19 in Israel having being
reduced significantly the Company has resumed its planned
strategies including the enhancement of the development resources.
We remain acutely aware of the COVID-19 situation in the
geographies that we trade and have development engagements,
specifically in India and Taiwan, and as such realise the risk of
an impact in delays in the timing of revenues as well as delays in
supplies not only to the Company but its customers, whose product
deployment could be materially impacted. Without modifying their
opinion, the auditors make reference to the existence of a material
uncertainty in relation to going concern within the audit report,
drawing attention to Note 2 of the Audited Financial Statements
enclosed in this Annual report.
Other than the points outlined above, there are no items on the
Balance Sheet that warrant further discussion outside of the
disclosures made in the Annual Financial of this Annual Report.
Mark Reichenberg
Chief Financial Officer
24 June 2021
Board of Directors
Joseph (Yosi) Albagli (Non-Executive Chairman)
Yosi was formally appointed as the Independent Non-executive
Director and Chairman on 10 March 2021. Yosi comes from an
engineering background, and has over 30 years of experience in
engineering, business strategy and management, and entrepreneurship
in the communications industry. Yosi co-founded and served as
President and CEO of Tdsoft Ltd in 1994, driving the company toward
becoming the leader in V5 solutions. In 2005, he led a reverse
merger with VocalTec (NASDAQ: VOCL) becoming President, CEO and a
board member, growing the company's market share, and establishing
it as a leader in Voice-over-IP technology. Yosi also served as
President and CEO of CTWARE Ltd., as a board member of ITGI Medical
(TASE), and as President of the Satellite Communications division
for Orbit Communication Systems (TLV: ORBI). Yosi is a Cum Laude
graduate of The Technion - Israel Institute of Technology with a
BSc degree in Civil Engineering and a veteran of the Israeli navy,
in which he taught electronics.
David Levi (Chief Executive Officer)
David has over 25 years in the telecom industry, with vast
technical and business experience in ATM, voice, TDM, SONET/SDH,
Ethernet and PON. Prior to founding Ethernity, David was the
founder of Broadlight, a semiconductor company that developed BPON
and GPON components and was acquired by Broadcom (BRCM) for $230
million. David invented the GPON protocol with two US patents
registered in his name. Prior to this, David worked as Director of
Product Marketing at ECI Telecom in the Broadband Access division,
and Senior Product Line Manager at RAD, responsible for $50 million
product line sales, a product manager at Tadiran Communication,
sales manager at Dynamode Ltd, and served as a Systems Engineer and
project manager in the Israeli Defense Forces.
Mark Reichenberg CA(SA) (Chief Financial Officer)
Mark is a qualified Chartered Accountant from South Africa.
Previously Mark held the position of VP Business Development and
Corporate Affairs Officer of the Magnolia Silver Jewellery Group
Limited, was the CFO of GLV International Ltd, and prior to that,
held the position of Group Financial Director of Total Client
Services Ltd, a company listed on the Johannesburg Stock Exchange.
Mark has held various senior financial director positions in
retail, wholesale and logistics. Mark holds a B. Acc degree from
the University of the Witwatersrand (WITS) in South Africa.
Shavit Baruch (VP Research and Development)
Shavit has over 25 years of experience in the telecom and
datacom industry, with vast technical experience in ATM, Ethernet
and SONET/SDH, both at the components and system level. Prior to
Ethernity Networks, Shavit served as Chief Architect at Native
Networks, a start-up company developing products for the Metro
Ethernet market. Prior to this, in 2002, Shavit established
Crescendo Networks, a start-up company enhancing data center
applications performance. Prior to the venture at Crescendo, Shavit
served as R&D Director at ECI Telecom, where he was in charge
of the development of all transmission cards for one of the world's
most successful broadband systems. Earlier, Shavit worked at Lannet
Data Communication, acquired by AVAYA, designing, together with
Galileo, Ethernet Switch on Silicon.
Neil Rafferty (Independent Non-Executive Director)
Neil has over 30 years of experience in the telecoms and
technology sectors holding a variety of senior executive positions
with AT&T, Global One and Cisco Systems. He has run businesses
in Switzerland and The Netherlands and was CEO of Easynet plc
(listed on the London Stock Exchange until it was acquired).
Latterly he has been advising companies across a variety of sectors
helping them implement growth strategies as well as sitting on a
number of Boards. Neil holds a BA (Hons) degree from Newcastle
Polytechnic.
Chen Saft-Feiglin (Independent Non-Executive Director)
Chen is a lawyer and notary admitted in Israel with more than 25
years of experience in commercial law, insolvency and recovery
procedures, as well as many years of experience as a business and
family mediator and family business consultant. Chen is the founder
and owner of Chen Saft, People, Processes and Enterprises,
providing consulting services for family firms and enterprises,
mediation in commercial disputes, and divorce mediation.
Previously, Chen was a partner at Saft Walsh Law Offices, a niche
law practice handling corporate, M&A, insolvency, private
client work and general representation of foreign clients (private
and corporate) in Israel. Chen holds an LLB from Bar Ilan
University and an MBA majoring in business and managerial
psychology from the College of Management Academic Studies. Chen
served as a Lieutenant in the Israel Defense Forces.
Zohar Yinon (Independent Non-Executive Director)
Zohar is currently the CEO of Bar Ilan University in Israel.
Prior to that Zohar held the position of CEO of Hagihon Company
Ltd, a position he held from September 2011 to January 2018.
Previously, Zohar was the Chief Financial Officer of Israel
Military Industries, Ltd. and VP Business Development in Granite
Hacarmel Ltd. Zohar has held other roles in Israel's private and
public sectors, including with companies traded on the Tel Aviv
Stock Exchange. Zohar holds a B.A. in Economics and an MBA in
Business Administration, both from Bar-Ilan University (Israel) and
he has graduated in managerial programs of M&A and Corporate
Governance from the Interdisciplinary Center ("IDC") in Herzliya.
He was a member of the CTG global panel of experts evaluating new
start-ups in the field of Clean-tech and has served as a board
member in a wide range of companies including governmental,
private, publicly listed and start-up companies. Zohar served as a
Major in the Israel Defense Forces.
Corporate Governance Statement
Introduction
The Board is responsible to shareholders for the effective
direction and control of the Company, with the aim of generating
long-term success for the Company.
The directors recognise the importance of high standards of
corporate governance and in accordance with the AIM Rules for
Companies and their requirement to adopt a recognised corporate
governance code, the Board has adopted the Quoted Companies
Alliance Corporate Governance Code (the "the Code"). The QCA Code
was developed by the QCA as an alternative corporate governance
code applicable to AIM companies.
As a company incorporated in Israel the Company also complies
with the corporate governance provisions of Israel's Companies Law,
5759-1999 (the "Companies Law") as may be applicable, the more
relevant of which relates to the constitution of the Board of
Directors, the Audit and Risk Committee and the Remuneration
Committee. Whilst the Israeli Law requirements are more onerous,
these have been incorporated into the requirements and guidance
under the QCA.
The Board believes that good corporate governance reduces risks
within the business, promotes confidence and trust amongst
stakeholders and is important in ensuring the effectiveness and
efficiency of the Company's management framework.
The Code is based around 10 broad principles of good corporate
governance, aimed at delivering growth, maintaining a dynamic
management framework, and building trust. The application of the
Code requires the Company to apply these 10 principles and to
publish certain related disclosures on its website and in its
Annual Report. The Company addresses the key governance principles
defined in the QCA Code as outlined on the Company website.
Further details of the Company's approach to the 10 principles
of the Code and how it applies these principles, which is updated
regularly as required with the most recent Company update being 10
March 2021, can be found on the Company`s Website section for
Investors at
https://ethernitynet.com/investors/#1454056723887-bab53599-82b7
.
The Directors and the Board
The Board is comprised of three executive directors, David Levi,
Mark Reichenberg and Shavit Baruch, and of four non-executive
directors, Joseph (Yosi) Albagli (Chairman), appointed on 10 March
2021, Neil Rafferty, Chen Saft-Feiglin and Zohar Yinon. The balance
between executive and non-executive directors encourages a
diversity of views, and ensures the independence of the directors,
not allowing any group to dominate the Board's decision making.
In accordance with Israel Companies Law, the Board must always
have at least two external directors who meet certain statutory
requirements of independence (the "External Directors"). The
Company's External Directors are currently Chen Saft-Feiglin and
Zohar Yinon. The term of office of an External Director is three
years, which can be extended for two additional three-year terms.
Under the Companies Law, External Directors are elected by
shareholders by a special majority and may be removed from office
only in limited cases. Any committee of the Board must include at
least one External Director and the Audit and Risk Committee and
Remuneration Committee must each include all of the External
Directors (including one External Director serving as the chair of
the Audit and Risk Committee and Remuneration Committee), and a
majority of the members of each of the Audit and Risk Committee and
Remuneration Committee must comply with the director independence
requirements prescribed by the Companies Law.
The detailed composition of the board is as follows:
Joseph (Yosi) Albagli Independent Non-Executive Chairman (Appointed 10 March 2021)
Chairman of the Nomination Committee
(Companies Law precludes the Chairman from being a member of the
Audit and Remuneration Committees)
David Levi Chief Executive Officer (re-elected 22 June 2020)
Nomination Committee member
Mark Reichenberg Chief Financial Officer and Company Secretary (re-elected 22 June 2020)
Shavit Baruch Vice President R&D (re-elected 22 June 2020)
Neil Rafferty Independent Non-Executive Director (re-elected 22 June 2020)
Audit and Risk Committee member
Remuneration Committee member
Nomination Committee member
Chen Saft Feiglin External Director
Remuneration Committee Chairman
Audit and Risk Committee member
Zohar Yinon External Director
Audit and Risk Committee Chairman
Remuneration Committee member
Biographical details of all the Directors are set out above.
Operation of the Board
The Board is responsible for the overall strategy and financial
performance of the Company and has a formal schedule of matters
reserved for its approval. In order to lead the development of the
strategy of the Company and the progress of financial performance,
the Board is provided with timely information that enables the
Board to review and monitor the performance of the Company and to
ensure it is in line with the Company's objectives in order to
achieve its strategic goals.
The CFO and Company Secretary, Mark Reichenberg is responsible
for ensuring that the Company complies with the statutory and
regulatory requirements and maintains high standards of corporate
governance. He supports and works closely with the Chairman of the
Board; the Chief Executive Officer and the Board committee chairs
in setting agendas for meetings of the Board and its committees and
supports the transfer of timely and accurate information flow from
and to the Board and the management of the Company.
During 2020, the Board met formally on sixteen occasions. Board
members also hold ad hoc discussions amongst themselves between
formal Board meetings to discuss governance, financial,
operational, and other business matters. A majority of the Board
members constitutes the legal quorum for a board meeting, and all
but three Board members attended all of the board meetings. All
Directors receive a board pack comprising of an agenda and all
relevant operational information in advance of each meeting.
Attendance at Board and Committee meetings by members of the
Board during the year ended 31 December 2020 was as follows:
Board Audit Committee Remuneration Nominations
Committee Committee
Number of meetings 16 7 2 1
------ ---------------- --------------- ---------------
Graham Woolfman
(Note 1) 16 7 (as invitee) 2 (as invitee) 1
------ ---------------- --------------- ---------------
David Levi 16 2 ( as invitee) 2 (as invitee) -
------ ---------------- --------------- ---------------
Mark Reichenberg 15 7 (as invitee) 2 (as invitee) 1 (as invitee)
------ ---------------- --------------- ---------------
Shavit Baruch 16 1 (as invitee) 1 (as invitee) -
------ ---------------- --------------- ---------------
Neil Rafferty 16 7 2 1
------ ---------------- --------------- ---------------
Chen Saft-Feiglin 15 6 2 1 (as invitee)
------ ---------------- --------------- ---------------
Zohar Yinon 13 6 2 1 (as invitee)
------ ---------------- --------------- ---------------
Note.
1. Resigned 17 November 2020, effective 17 February 2021
--------------------------------------------------------------------------------
The increase in the number of Board meetings held during the
year under review over the previous year arose due to significant
circumstances that could have had a material impact on the Company
and its operations, these being:
-- Continued review and evaluation of the impact of COVID-19 on the Company and its operations.
-- Review of financial reserves and fund requirements.
-- Fundraising activities undertaken by the Company during the latter half of 2020.
Reviews of activities to ensure reserves were maintained at
adequate levels to meet the planned development resources for
product and solutions deliverables.
Re-election of Directors
In accordance with the Company's Articles the Directors are
required to serve for a period of no less than three years from the
date of appointment, or in the case of Admission, for 3 years from
the date of Admission of the Company to AIM.
In terms of the General Meeting of the Company held on 22 June
2020, the term of David Levi and Shavit Baruch, in their capacity
as directors, has been extended until 22 June 2023, the term of
Mark Reichenberg, Graham Woolfman and Neil Rafferty, in their
capacity as directors, has been extended until 28 June 2023. In
terms of the Annual General Meeting of the Company held on 14
September 2020, Chen Saft-Feiglin and Zohar Yinon, in their
capacity as external directors were reappointed as Directors for a
three year term commencing from 15 November 2020 and ending on 14
November, 2023.
Yosi Albagli was formally appointed as the Independent
Non-Executive Chairman on 10 March 2021 for an initial period of
three years.
Board Committees
The Board has established properly constituted Audit and Risk,
Remuneration and Nomination Committees of the Board with formally
delegated duties and responsibilities.
Audit and Risk Committee
The UK Corporate Governance Code recommends that an Audit and
Risk Committee should comprise at least three members who are
independent non-executive directors, and that at least one member
should have recent and relevant financial experience. The Israel
Companies Law requires that at least two the External Directors and
one other non-executive director are members of the Committee, and
that the Chairman of the Company may not be a member of the
Committee.
The Audit and Risk Committee, which comprises the Independent
Non-Executive and External Directors (excluding the Chairman) and
by permanent invite the Chairman and the CFO. The Committee is
chaired by Zohar Yinon with the remaining members being Neil
Rafferty and Chen Saft-Feiglin. The Committee invites other members
of the Board as well as the Independent and Internal Auditors of
the Company to attend meetings as appropriate. The Audit and Risk
Committee has responsibilities which include the review of:
-- The Company's internal control environment;
-- Financial risks and Internal Audit;
-- Financial statements, reports, and announcements, including
the Board's responsibility to present an annual report that is
fair, balanced, and understandable. The Committee evidences this
review in a report to the Board following its meeting with the
auditors to discuss their Report to the Committee and includes an
assessment of the information provided in support of the Board's
statement on going concern and on any significant issues and how
those issues were addressed;
-- Independence of auditors, including a review of the non-audit
services provided and the level of such fees relative to the audit
fee. In reviewing the Annual Financial Statements, discussions take
place with the Auditor`s without executive management present and
discussions are also held on the effectiveness of external audit;
and
-- Ensuring the Company has a policy which allows any member of
staff to raise, in confidence, any concern about possible
impropriety in matters of financial reporting or other matters, and
to ensure that suitable arrangements are in place for a
proportionate independent investigation of such matters including
any follow-up action required.
During the year ended 31 December 2020, the Committee met on
seven occasions and the matters considered included the
following:
-- The discussion and approval of the audit work plan for the
2019 year end audit, Fair Value report and the treatment of
Capitalisation of the Research and Development costs, an update on
the cash flow status and review of going concern requirements.
-- Review of final timing regarding release of the Audited
Financial Statements for 31 December 2019, discussions on the Fair
Value report regarding the Intangible Assets, going concern
reporting under COVID-19 along with best market practice and
additional new IFRS reporting requirements.
-- Consideration of the Company`s annual audited financial
statements for the year ended 31 December 2019 and recommendation
to the Board for publication thereof.
-- Review of the Interim Unaudited Financial Statements as at 30
June 2020, review of going concern and reporting, the COVID-19
continuing situation and formal recommendation to the Board for the
Issuance of the Interim Unaudited Financial Statements as at 30th
June 2020.
-- Presentation by the Internal Auditors of their report,
initial audit planning for the 2020 annual results and possible
complexities surrounding the various fund raising transactions that
had taken place during the year.
Remuneration Committee
The Israel Companies Law requires that at least two of the
External Directors and one other non-executive director are members
of the committee, and that the Chairman of the Company may not be a
member of the Committee.
The Remuneration Committee comprising the Independent
Non-Executive and External Directors (excluding the Chairman) is
chaired by Ms. Chen Saft-Feiglin with the other members being Neil
Rafferty and Zohar Yinon. The Committee invites other members of
the Board to attend meetings as appropriate.
The Remuneration Committee has responsibility for reviewing and
recommending to the Board the remuneration and incentive
arrangements for the executive and non-executive directors, and
delegated authorities to the chief executive relating to senior
staff. The Remuneration Committee also has responsibility for:
-- Recommending to the Board the adoption of or variations to a
Compensation Policy for Office Holders and monitoring its
implementation.
-- Recommending to the Board any changes to the remuneration and
incentive arrangements in accordance with the policy, for each
executive and non-executive director (excluding the External
directors), and senior executives.
The remuneration of all External Directors is fixed in terms of
Israel Companies Law.
During the year ended 31 December 2019, the Remuneration
Committee met formally on two occasions and confirmed the
following.
-- Options to be granted in terms of the Company's Employee
Share Option Scheme were approved and recommended to the Board for
ratification.
-- Review of options to be awarded to key members of staff
including award of options to the CFO, share based compensation to
non-executive directors, and recommendation of these actions to the
Board of Directors.
Nominations Committee
The Committee's responsibilities include ensuring that the size
and composition of the Board is appropriate for the needs of the
Company including an assessment of the diversity profile, selecting
the most suitable candidate or candidates for the Board and to
oversee succession planning aspects for the Board.
During the year under review, this Committee comprised the Chief
Executive Officer, David Levi and the Independent Non-Executive
Directors Graham Woolfman and Neil Rafferty and was chaired by
Graham Woolfman until December 2020.
During the year ended 31 December 2020, the Nominations
Committee met on one occasion to deal with the process of the
recruitment of a new Independent Non-Executive Chairman and confirm
the brief regarding the recruitment requirements and process. In
this instance, the Committee was temporarily reconstituted with
Neil Rafferty in the Chair and the other members being David Levi,
Chen Saft-Feiglin and Zohar Yinon.
Subsequent to the appointment of Yosi Albagli as Chairman in
March 2021, the Committee has reverted back to its original
composition of the Company Chairman, now Yosi Albagli, as the
Chairman of the Committee and the remainder of the members being
David Levi, the CEO and Neil Rafferty the Independent Non-Executive
Director.
Internal Control
The Board considers on an ongoing basis the process for
identifying, evaluating, and managing significant risks faced by
the Company. This has been in place throughout the year and up to
the date of approval of the Financial Statements. The process is
regularly reviewed by the Board. The Directors are responsible for
the Company's system of internal control and for reviewing its
effectiveness. However, such a system can only provide reasonable,
but not absolute, assurance against material misstatement or loss.
The Company's system of internal control includes appropriate
levels of authorisation and segregation of duties. Financial
information is presented to the Board regularly comprising
management accounts and other financial data which allows for
regular reviews of performance.
The Company's key internal financial control procedures
include:
-- A review by the Board of actual results compared with budget and forecasts;
-- Reviews by the Board of year end forecasts;
-- The establishment of procedures for capital expenditure and
expenditure incurred in the ordinary course of business.
The external auditors are engaged to express an opinion on the
financial statements. They discuss with management the reporting of
operational results and the financial condition of the Company, to
the extent necessary to express their audit opinion.
Internal Audit
The new Internal Auditors, PKF Amit Halfon, appointed in
November 2019 presented their maiden report to the Audit and Risk
Committee during the year under review. Due to the size and nature
of the Company, the Audit and Risk Committee had agreed with the
Internal Auditors that the initial review would comprise the
following:
-- Review of the business, identify key high risk areas and review controls.
-- Identify risks.
-- Assess risks and present findings.
-- Prepare multi-year audit plan.
The Audit and Risk Committee approved the continuation of the
work plan as outlined by the Internal Auditor.
Insurance
The Company maintains appropriate insurance cover in respect of
litigation against the Directors and Officers of the Company.
Directors' Report
The Directors present their Annual Report and the audited
Financial Statements for the financial year ended 31 December
2020.
Principal Activities
Ethernity Networks is a technology solutions provider that
develops and delivers data processing technology and solutions used
in high-end Carrier Ethernet applications across the telecom,
mobile, security and data center markets. 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.
The Company is headquartered in Israel.
Results and Dividends
The Consolidated Statement of Comprehensive Income for the year
is set in the Statement of Comprehensive Loss further on in this
report. No dividend is proposed for the year.
Risk Management
The Company's policies for managing risk arising from activities
are set out in Note 26 of the Financial Statements.
Directors
The current Directors of the Company are:
Joseph Albagli Independent Non-Executive Chairman
David Levi Chief Executive Officer*
Mark Reichenberg Chief Financial Officer*
Shavit Baruch VP R&D*
Neil Rafferty Independent Non-Executive Director*
Chen Saft-Feiglin External Director**
Zohar Yinon External Director**
* Reelected 22 June 2020
** Re-elected 14 September 2020, effective 15 November 2020. An
independent director appointed as an External Director in terms of
Israel Companies Law
Directors' Interests
The interests of current Directors in shares and options are
disclosed in the Directors' Remuneration Report set out in Note 28
of the financial statements.
Statement Of Directors' Responsibilities In Respect Of The
Annual Report And The Financial Statements
Directors' Responsibilities
The Directors are responsible for preparing the Annual Report
(including Director's Report and Strategic Report) and the
financial statements in accordance with applicable laws and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have elected to prepare the financial statements in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the European Union. Under company law the Directors must not
approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that period.
The Directors are also required to prepare financial statements in
accordance with the rules of the London Stock Exchange for
companies trading securities on the Alternative Investment Market
(AIM).
In preparing these financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and accounting estimates that are reasonable and prudent;
-- state whether they have been prepared in accordance with IFRS
as adopted by the European Union, subject to any material
departures disclosed and explained in the financial statements;
-- recognise the possible impact of COVID-19 on the Company as a whole; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the requirements of the
Companies Act 2006. They are also responsible for safeguarding the
assets of the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
Website Publication
The Directors are responsible for ensuring the Annual Report and
the financial statements are made available on a website. Financial
statements are published on the Company's website in accordance
with legislation in the Israel and the United Kingdom governing the
preparation and dissemination of financial statements, which may
vary from legislation in other jurisdictions. The maintenance and
integrity of the Company's website is the responsibility of the
Directors. The Directors' responsibility also extends to the
ongoing integrity of the financial statements contained
therein.
COVID-19 and Going Concern
In light of the continued duration of the COVID-19 pandemic that
prevailed through the entire year of 2020, and the uncertainty on
the potential ongoing and future impact, the Board took certain
steps to both safeguard the well-being of staff and to position the
Company for the future. Where possible a work-from-home policy was
implemented and all non-discretionary expenditure was curtailed.
The Company also took prudent steps to mitigate any impact through
certain short-term cash conservation measures, including a
reduction by all directors of up to 50% of their remuneration, with
20% of the reduction deferred.
The implementation of these cash management measures expected to
allow the Company to meet its planned objectives in the absence of
a prolonged uncertain outlook due to the effects of COVID-19.
However, the Company recognises that revenues are likely to be
delayed due to COVID-19 uncertainty, including where engaged
customers' functions are affected through remote working
arrangements. The Board continues to closely monitor the situation
and will take further action, as appropriate, to manage its working
capital position and strengthen the balance sheet to support the
execution of the Company's plans.
On 8 April 2020 and further on 6 May 2020, the Company announced
that the rapid pace of developments in connection with COVID-19 had
caused levels of uncertainty and that, in common with many other
companies, it may need to seek alternative sources of funding,
including having applied for a grant from the Israel Innovation
Authority. On 17 June 2020 the Company advised the market in an
update that the application for the grant from the Israel
Innovation Authority had been declined. The Company went on to
state that it had taken prompt action to institute further cash
conservation measures, which include a reduction in R&D
resources that are not tightly coupled to the deliveries around
Ethernity's 5G UPF-based ACE-NIC100 product offering in order to
maintain the Company's momentum in this area.
Furthermore, in light of the situation regarding the Israel
Innovation Authority grant the Board reviewed the Company's product
developments to focus resources and solutions on its key markets
and customers. The revised focus will delay further developments in
products outside of Ethernity's key focus on NFV (network function
virtualisation) and the 5G market.
Due to not receiving the Innovation Authority grant the Company
announced it would seek access to additional funding in order to
trade to its revised plan, strengthen its position in the market,
maximise its ability to secure contracts and conclude negotiations
on terms favourable to the Company. The Company has raised at total
of $7,258,615 from the date of that announcement to the date of
this report.
Independent auditor's report
To the Shareholders of
Ethernity Networks Ltd.
Opinion
We have audited the financial statements of Ethernity Networks
Ltd. (the "Company"), which comprise the Statement of financial
position as of 31 December 2020 and the Statement of comprehensive
loss, the Statement of changes in equity and the Statement of cash
flows for the year then ended, and notes to the financial
statements, including a summary of significant accounting
policies.
In our opinion, the accompanying financial statements present
fairly, in all material respects, the financial position of the
Company as of 31 December 2020 and its financial performance and
its cash flows for the year then ended in accordance with
International Financial Reporting Standards (IFRSs).
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (ISAs). Our responsibilities under those
standards are further described in the Auditor's responsibilities
for the audit of the financial statements section of our report. We
are independent of the Company in accordance with the International
Ethics Standards Board for Accountants' International Code of
Ethics for Professional Accountants (including International
Independence Standards) (IESBA Code) together with the ethical
requirements that are relevant to our audit of the financial
statements in Israel, and we have fulfilled our other ethical
responsibilities in accordance with these requirements and the
IESBA Code. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Material uncertainty related to going concern
We draw attention to Note 2 in the financial statements, which
indicates that the Company incurred a net comprehensive loss of 6.2
million US dollars and negative cash flows from operating
activities of 3.6 million US dollars during the year ended 31
December 2020 . As stated in Note 2, these events or conditions,
along with other matters as set forth in Note 2, indicate that a
material uncertainty exists that may cast significant doubt on the
Company's ability to continue as a going concern. Our opinion is
not modified in respect of this matter.
Key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the financial
statements for the year ended 31 December 2020 . These matters were
addressed in the context of our audit of the financial statements
as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters. In addition to the
matter described in the Material Uncertainty Related to Going
Concern section, we have determined the matters described below to
be key audit matters to be communicated in our report.
Description of Key Audit Description of Auditor's Response
Matter and why a matter and Key Observations
of most significance
in the audit
Intangible The intangible assets Our audit work included, but was not
assets include development costs restricted to:
that are directly attributable We assessed the recoverability of
to a project's development intangible assets by testing management's
phase. Such intangible estimation of the value in use as
assets not yet available part of the Intangible Asset Impairment
for use are required Test that was performed by management
to be tested for impairment (as described in Note 10).
irrespective of whether Such assessment included the evaluation
there is any indication of the competence of management in
of impairment. The impairment accordance with ISA 500 (Audit Evidence).
analysis of intangible The assessment also included testing
assets involves significant of evidence obtained from various
management judgement areas of the audit including cash
and therefore identified flows forecasts of revenue, expenses
the impairment analysis and profitability, the appropriateness
of intangible assets of discount rates used related to
as a significant risk, the capitalised intangible assets,
which was one of the the most recent and updated business
most significant assessed plans, Valuation model, working capital,
risks of material misstatement useful life and the compliance with
the requirements of IAS 36, impairment
of assets.
Based on the audit work performed,
we have not identified any material
misstatement in the impairment of
intangibles.
-------------------------------- -------------------------------------------
Information other than the financial statements and auditor's
report thereon
Management is responsible for the other information. The other
information comprises the information included in the annual report
other than the financial statements and our auditor's report
thereon Our opinion on the financial statements does not cover the
other information and we do not express any form of assurance
conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information identified above
and, in doing so, consider whether the other information is
materially inconsistent with the financial statements or our
knowledge obtained in the audit or otherwise appears to be
materially misstated. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing
to report in this regard.
Responsibilities of management and the board of directors for
the financial statements
Management is responsible for the preparation and fair
presentation of the financial statements in accordance with IFRS,
and for such internal control as management determines is necessary
to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible
for assessing the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and
using the going concern basis of accounting unless management
either intends to liquidate the Company or to cease operations, or
has no realistic alternative but to do so.
The Board of Directors is responsible for overseeing the
Company's financial reporting process.
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance but is not a guarantee that an audit
conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
As part of an audit in accordance with ISAs, we exercise
professional judgment and maintain professional skepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal
control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by management.
-- Conclude on the appropriateness of management's use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Company's
ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in
our auditor's report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditor's report. However, future events or
conditions may cause the Company to cease to continue as a going
concern.
-- Evaluate the overall presentation, structure and content of
the financial statements, including the disclosures, and whether
the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
We communicate with the Board of Directors regarding, among
other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide the Board of Directors with a statement that we
have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with the Board of Directors, we
determine those matters that were of most significance in the audit
of the financial statements of the year ended 31 December 2020 and
are therefore the key audit matters. We describe these matters in
our auditor's report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be
communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
The engagement partner on the audit resulting in this
independent auditor's report is Nir Yenni.
FAHN KANNE & CO. GRANT THORNTON ISRAEL
Tel-Aviv, Israel, 24 June 2021
STATEMENTS OF FINANCIAL POSITION
US dollars
--------------------------
31 December
--------------------------
Notes 2020 2019
-------- ------------ ------------
ASSETS
Current
Cash and cash equivalents 5 2,180,726 1,116,922
Other short-term financial assets 6 - 2,553,823
Trade receivables 7 778 ,061 427,162
Inventories 173,494 166,905
Other current assets 8 626,690 362,791
Current assets 3,758,971 4,627,603
Non-Current
Property and equipment 9 552,112 525,542
Deferred tax assets 24 186,772 18 6,772
Intangible asset 10 7,385,560 8,436,010
Right -of -use asset 11 292,219 448,081
Other long term assets 7,507 5,167
Non-current assets 8,424,170 9,601,572
Total assets 12,183,141 14,229,175
============ ============
LIABILITIES AND EQUITY
Current
Short Term Borrowings 12 411,726 1,012,731
Trade payables 290,175 325,240
Liability related to share subscription agreement 15.F.[3] 841 ,944 -
Warrants liability 15.F.[2] 286 ,253 -
Other current liabilities 11,13 1,275,849 1,12 6,007
------------ ------------
Current liabilities 3,105,947 2,4 63,978
Non-Current
Lease liability 11 146,130 306,783
------------ ------------
Non-current liabilities 146,130 306,783
Total liabilities 3,252,077 2,770,761
Equity 15
Share capital 12,495 8,039
Share premium 26,849,698 23,396,310
Other components of equity 1,161,350 892,891
Accumulated deficit (19,092,479) (12,838,826)
------------ ------------
Total equity 8 ,931,064 11,4 58,414
Total liabilities and equity 12,183,141 14,229,175
============ ============
The accompanying notes are an integral part of the financial
statements.
STATEMENTS OF COMPREHENSIVE LOSS
US dollars
-------------------------------
For the year ended
31 December
-------------------------------
Notes 2020 2019
------- ------------------ -----------
Revenue 17 , 27 1,853,732 1,343,844
Cost of sales 271 ,453 193,012
------------------ -----------
Gross profit 1,582,279 1,150,832
Research and development expenses 18 4,037,904 2,855,896
General and administrative expenses 19 1,591,079 1,426,376
Marketing expenses 20 1,082 ,560 1,434,670
Other income 21 (40,335) (23,337)
------------------ -----------
Operating loss (5,088,929) (4,542,773)
Financing costs 22 (1,462,740) (93,584)
Financing income 23 298 ,016 88,325
------------------ -----------
Loss before tax (6,253,653) (4,548,032)
Tax expense 24 - (613,228)
------------------ -----------
Net comprehensive loss for the year (6,253,653) (5,161,260)
================== ===========
Basic and diluted loss per ordinary share 25 (0.17) (0.16)
================== ===========
Weighted average number of ordinary shares
for basic loss per share 36,590,988 32,556,686
================== ===========
The accompanying notes are an integral part of the financial
statements.
STATEMENTS OF CHANGES IN EQUITY
US dollars
Number Other
of Share Share components Accumulated Total
Notes shares Capital premium of equity deficit equity
---------- -------- ----------- --------------- ------------ -----------
Balance at 1 January 2019 32,556,686 8,039 23,396,310 760,849 (7,677,566) 16,487,632
Employee share-based
compensation - - - 132,042 - 132,042
Net comprehensive loss for
the
year - - - - (5,161,260) (5,161,260)
Balance at 31 December 2019 32,556,686 8,039 23,396,310 892,891 (12,838,826) 11,4 58,414
Employee share-based
compensation - - - (79,635) - (79,635)
Exercise of
employee
options 15.F.[1] 338,000 99 33,701 - - 33,800
Net proceeds
allocated to
the issuance
of ordinary
shares 15.F.[2] 7,333,334 2,140 914,595 - - 916 ,735
Exercise of
warrants 15.F.[2] 3,744,426 1,165 1,632,220 - - 1,633 ,385
Shares issued
pursuant to
share
subscription
agreement 15.F.[3] 2,466,051 750 984 ,732 - - 985 ,482
Shares issued,
not yet paid
for
* 15.F.[4] 880,000 258 196,259 - - 196 ,517
Expenses paid in
shares and
warrants 15.F.[5] 150,000 4 4 39,975 - - 40,019
Net comprehensive loss for
the
year - - - - (6,253,653) (6,253,653)
12,49
Balance at 31 December 2020 47,468,497 5 27 ,197,792 813,256 (19,092,479) 8 ,931,064
========== ======== =========== =============== ============ ===========
* These shares were not paid for except for the par value of
$258 which was paid for.
The accompanying notes are an integral part of the financial
statements.
STATEMENTS OF CASH FLOWS
US dollars
----------------------------------------------
For the year ended 31 December
----------------------------------------------
2020 2019
---------------------- ----------------------
Operating activities
Net comprehensive loss for the year (6,253,653) (5,161,260)
Non-cash adjustments
Depreciation of property and equipment 156,012 151,997
Depreciation of operating lease right of use asset 155,862 122,729
Share-based compensation 18,209 69 ,654
Amortisation of intangible assets 952,606 734,752
Amortisation of liabilities - 3,499
Deferred tax expenses - 613,228
Foreign exchange gains (losses) on cash balances 145,258 (7,878)
Capital Loss 5,275 -
Revaluation of financial instruments, net 1,335 ,172 -
Expenses paid in shares and options 40,019 -
Net changes in working capital
(Increase) decrease in trade receivables (350,899) 214,923
Increase in inventories (6,589) (50,893)
Decrease (increase) in other current assets 104,468 46,459
Increase in other long-term assets (2,340) (5,167)
(Decrease) increase in trade payables (35,064) 36,932
Increase (decrease) in other liabilities 140 ,837 (99,612)
Net cash used in operating activities (3,594,827) (3,330,637)
Investing activities
Withdrawals from other short-term financial assets 2,553,823 11,529,886
Deposits to other short-term financial assets - (6,000,000)
Purchase of property and equipment (187,857) (71,482)
Amounts carried to intangible assets - (2,238,559)
Net cash provided by investing activities 2,365,966 3,219,845
Financing activities
Proceeds from share subscription agreement 1,164,190 -
Proceeds allocated to ordinary shares, net 916,993 -
Proceeds allocated to warrants 82,251 -
Proceeds from exercise of warrants and options 1,027,142 -
Repayment of IIA liability - (20,834)
Proceeds from short term borrowings 636,993 1,012,731
Repayment of short-term borrowings (1,237,998) (133,497)
Repayment of lease liability (151,648) (112,379)
Net cash provided by financing activities 2,437,923 746,021
Net change in cash and cash equivalents 1,209,062 635 ,229
Cash and cash equivalents, beginning of year 1,116,922 473,815
Exchange differences on cash and cash equivalents (145,258) 7,878
Cash and cash equivalents, end of year 2,180,726 1,116,922
====================== ======================
Supplementary information:
Interest paid during the year 9,764 2,727
---------------------- ----------------------
Interest received during the year 63,059 88,325
---------------------- ----------------------
Supplementary information on non-cash activities:
Share-based compensation capitalised to intangible assets (97,844) 62,388
---------------------- ----------------------
Recognition of right-of-use asset and lease liability - 570,810
---------------------- ----------------------
Shares issued, not yet paid for 196,259 -
---------------------- ----------------------
Shares issued pursuant to share subscription agreement 985,482 -
---------------------- ----------------------
Expenses paid in shares and warrants 40,019 -
---------------------- ----------------------
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 provides innovative, comprehensive networking and
security solutions on programmable hardware for accelerating
telco/cloud networks performance. Ethernity's FPGA logic offers
complete Carrier Ethernet Switch Router data plane processing and
control software with a rich set of networking features, robust
security, and a wide range of virtual function accelerations to
optimise telecommunications networks. Ethernity's complete
solutions quickly adapt to customers' changing needs, improving
time-to-market and facilitating the deployment of 5G, edge
computing, and different NFV appliances including 5G UPF, SD-WAN,
vCMTS and vBNG with the current focus on 5G emerging appliances.
The Company's customers are situated worldwide.
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.
COVID-19
The Company had previously stated that in light of the continued
uncertainty on the potential impact and duration of the COVID-19
pandemic, the Board had taken certain steps to both safeguard the
well-being of staff and to position the Company for the future.
This included that, in common with many other companies, it may
need to seek alternative sources of funding. These steps were
successfully undertaken, with total funds raised by the Company
from July 2020 to date from the placing, warrants and the Share
Subscription Agreement of GBP5.4m ($7.3m), and the Company managed
to maintain its operational capacity and deliverables during the
extremely difficult time the world endured due to COVID-19.
Currently, with the impact of COVID-19 in Israel having been
reduced significantly, the Company has resumed its planned
strategies including the enhancement of the development
resources.
Considering the worldwide components shortage issue that albeit
has been currently resolved for the Company, along with the
residual COVID-19 disruptions worldwide and the current exponential
outbreak of COVID-19 in India and Taiwan, there remains elements of
uncertainty over the timing of near-term events due to the
challenges faced by our customers regarding both timing of
component supply and the meeting of their own plans. We draw
attention to Note 2 following this below.
NOTE 2 - GOING CONCERN
The financial statements have been prepared assuming that the
Company will continue as a going concern. Under this assumption, an
entity is ordinarily viewed as continuing in business for the
foreseeable future unless management intends or has no realistic
alternative other than to liquidate the entity or to stop trading
for at least, but not limited to, 12 months from the reporting
date. The assessment has been made of the Company's prospects,
considering all available information about the future, which have
been included in the financial budget, from managing working
capital and among other factors such as debt repayment schedules.
Consideration has been given inter alia, to the current stage of
the Company's life cycle, its losses and cash outflows, including
with respect to the development of the Company's products, the
expected timing and amounts of future revenues. This includes the
proven success and ability of the Directors to raise further funds
either through debt, equity or deferral of liabilities. Cogniscance
is given to the Directors current assessment of financial and
operational risk and their best estimate of the potential impact of
COVID-19 and the availability of components on operations and the
continued possible material uncertainties arising therefrom. As of
31 December 2020, the Company incurred a n accumulated deficit of
19.1 million dollars and reported net comprehensive loss of 6.3
million dollars and negative cash flows from operating activities
of 3.6 million dollars during the year ended December 31, 2020. The
Company also has not yet generated material revenues from its
operations to fund its activities and is therefore dependent upon
external sources for financing its operations.
In January 2020, the Company's forecast for the financial year
showed a movement into positive operational cash flow from the end
of the first half of 2021, having taken into account the effects of
the cash flow enhancement measures announced. However, on 8 April
2020 and further on 6 May 2020, it announced that the rapid pace of
developments in connection with COVID-19 had caused levels of
uncertainty that may result in the need to seek alternative sources
of funding.
The Company renegotiated its short term banking facilities with
its bankers, with the resultant new facility being a change from
550,000 NIS short term facility to a NIS 1,600,000 ($497,604)
facility consisting of NIS 100,000 ($31,104) short term facilities
and a NIS 1,500,000 ($466,500) revolving invoice financing
facility
In a further announcement on 17 June 2020 the Company stated
that it was likely that the Company would need to seek access to
additional funding in order to trade to its revised plan.
Within a month of the 17 June 2020 announcement, the Company
confirmed the Placing and subscription to raise an additional
GBP880,000 ($1.10m). In addition, the Company continued to raise
further funds during the second half of the financial year ended 31
December 2020, resulting in raising significant additional funds so
as to meet the operational and development goals. The funds were
raised via a Placing in July 2020 which included the issue of
Warrants), the majority or which being exercised and completed in
May of 2021. Furthermore, the Company successfully concluded a
Share Subscription Agreement with the 5G Innovation Leaders Fund
LLC ("5G Fund"), a U.S.-based specialist investor, in relation to
the issue of new ordinary NIS 0.001 shares ("Shares"), to raise up
to GBP3,200,000 (approximately $4,100,000).
To date, the Company raised via the Placing in July GBP2.66
million ($3.55 million) all of which closed on 12 May 2021 from the
initial issue of shares and the exercising of the related Warrants,
which included GBP616,667 from the Directors. As of 31 December
2020, the Company raised a total of GBP2.51m ($3.23m) from the
Placing and Share Subscription noted above, with a further GBP2.86m
($3.97m) to date in 2021, bringing the total funds raised from the
time of the June announcement to date of GBP5.37m ($7.26m).
In the light of enquiries made by the Directors as to the
current liquidity position of the Company, as well as bearing in
mind the ability and success of the Company to raise funds
previously, the Directors have a reasonable expectation that the
Company will have access to adequate resources to continue in
operational existence for the foreseeable future and therefore have
adopted the going concern basis of preparation in the financial
statements.
Notwithstanding as described above, there is material
uncertainty that may cast doubt on the Company's ability to
continue as a going concern and fulfil its obligations and
liabilities in the normal course of business in the near future.
The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
NOTE 3 - 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 2020,
no new standards that had a material effect on these financial
statements become effective.
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 statements have been prepared on an accrual basis
and under the historical cost convention, except for financial
instruments measured at fair value through profit and loss and
deferred taxes.
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 2020
(including comparative amounts) were approved and authorised for
issue by the board of directors on 24 June 2021.
B. Use of significant accounting estimates and assumptions and judgements
The preparation of financial statements in conformity with IFRS
requires management to make accounting estimates and assessments
that involve use of judgment and that affect the amounts of assets
and liabilities presented in the financial statements, the
disclosure of contingent assets and liabilities at the dates of the
financial statements, the amounts of revenues and expenses during
the reporting periods and the accounting policies adopted by the
Company. Actual results could differ from those estimates.
Estimates and judgements are continually evaluated and are based
on prior experiences, various facts, external items and reasonable
assumptions in accordance with the circumstances related to each
assumption.
Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the
period in which the estimates are revised and in any future periods
affected.
Regarding significant judgements and estimate uncertainties, see
Note 4.
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.
Exchange rate differentials are recognised in the financial
statements when incurred, as part of financing expenses or
financing income, as applicable.
The exchange rates as at the 31st of December, of one unit of
foreign currency to each US dollar, were:
2020 2019
New Israeli Shekel
("NIS") 0.311 0.289
Sterling 1.366 1.319
Euro 1.227 1.122
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
Furniture and equipment 6-15
Leasehold improvements 33
Leasehold improvements are depreciated on a straight-line basis
over the shorter of the lease term (including any extension option
held by the Company and intended to be exercised) and the expected
life of the improvement.
Depreciation of an asset ceases at the earlier of the date that
the asset is classified as held for sale and the date that the
asset is derecognised. An asset is derecognised on disposal or when
no further economic benefits are expected from its use.
G. Basic and diluted earnings (loss) per share
Basic and diluted earnings (loss) per share is computed by
dividing the income for the period applicable to Ordinary Shares by
the weighted average number of ordinary shares outstanding during
the period.
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 settlement of other
financial instruments convertible or settleable with ordinary
shares using the "if-converted method".
H. Severance pay liability
The Company's liability for severance pay pursuant to Israel's
Severance Pay Law is based on the last monthly salary of the
employee multiplied by the number of years of employment, as of the
date of severance.
Pursuant to section 14 of Severance Pay Law, which covers the
Company's employees, monthly deposits with insurance companies
release the Company from any future severance obligations in
respect of those employees (defined contribution). Deposits under
section 14 are recorded as an expense in the Company's statement of
comprehensive income.
I. Research and development expenses
Expenditures on the research phase of projects to develop new
products and processes are recognised as an expense as
incurred.
Development activities involve a plan or a design for the
production of new or substantially improved products and processes.
Development costs that are directly attributable to a project's
development phase are recognised as intangible assets, provided
they meet all of the following recognition requirements:
-- the technical feasibility of completing the intangible asset
so that it will be available for use or sale.
-- intention to complete the intangible asset and use or sell
it.
-- ability to use or sell the intangible asset.
-- ability to demonstrate how the intangible asset will generate
probable future economic benefits. Among other things, the entity
can demonstrate the existence of a market for the output of the
intangible asset or the intangible asset itself or, if it is to be
used internally, the usefulness of the intangible asset.
-- the availability of adequate technical, financial and other
resources to complete the development and to use or sell the
intangible asset.
-- ability to measure reliably the expenditure attributable to
the intangible asset during its development.
Development costs not meeting these criteria for capitalisation
are expensed as incurred.
Directly attributable costs include (if relevant) employee costs
incurred on software development along with an appropriate portion
of relevant overheads and borrowing costs.
The Company maintained the policy of recognising as an
intangible asset the costs arising from the development of its
solutions, specifically the directly associated costs of its
Research and Development center.
The Company periodically reviews the principles and criteria of
IAS 38 as outlined above. Up and until June 2019, the Company has
determined that all the above criteria were met.
Effective as from 1 July 2019 and thereafter, the Company
concluded that it would no longer continue recognising these costs
as an intangible asset due to the uncertainty that exists as to the
amounts and timing of revenues to be generated from the intangible
assets.
An intangible asset that was capitalised but not yet available
for use, is not amortised and is subject to impairment testing once
a year or more frequently if indications exist that there may be a
decline in the value of the asset until the date on which it
becomes available for use (see also Note 10).
The amortisation of an intangible asset begins when the asset is
available for use, i.e., it is in the location and condition needed
for it to operate in the manner intended by management. The
development asset is amortised on the straight-line method, over
its estimated useful life, which is estimated to be ten years.
The useful life and the amortisation method of each of the
intangible assets with finite lives are reviewed at least at each
financial year end. If the expected useful life of an asset differs
from the previous estimate, the amortisation period is changed
accordingly. Such change is accounted for as a change in accounting
estimate in accordance with IAS 8.
Commencing 1 July 2019, the Company ceased to capitalise
development expenses (see Note 10).
J. Government grants
Government grants are recognised where there is reasonable
assurance that the grant will be received and all attached
conditions will be complied with. When the grant relates to an
expense item (such as research and development of an intangible
asset), it is recognised as 'other income' on a systematic basis
over the periods that the costs, which it is intended to
compensate, are expensed.
Where the grant relates to an asset (such as development
expenses that were recognised as an intangible asset), it is
recognised a deduction of the related asset.
Grants from the Israeli Innovation Authority of the Ministry of
Economy (hereinafter - the "IIA") in respect of research and
development projects are accounted for as forgivable loans
according to IAS 20 Accounting for Government Grants and Disclosure
of Government Assistance, as the company might be required to
refund such amount through payment of royalties.
Grants received from the IIA are recognised as a liability
according to their fair value on the date of their receipt, unless
there is reasonable assurance that the amount received will not be
refunded. The fair value is calculated using a discount rate that
reflects a market rate of interest at the date of initial
recognition. The difference between the amount received and the
fair value on the date of receiving the grant is recognised as a
deduction from the cost of the related intangible asset or as other
income, as applicable.
The amount of the liability is re-examined each period, and any
changes in the present value of the cash flows discounted at the
original interest rate of the grant are recognised in profit or
loss.
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 21).
K. Financial instruments
A financial instrument is any contract that gives rise to a
financial asset of one entity and a financial liability or equity
instrument of another entity.
1. Classification and measurement of financial assets and financial liabilities
Initial recognition and measurement
The Company initially recognises trade receivables on the date
that they originated. All other financial assets and financial
liabilities are initially recognised on the date on which the
Company becomes a party to the contractual provisions of the
instrument. A financial asset or a financial liability are
initially measured at fair value with the addition, for a financial
asset or a financial liability that are not presented at fair value
through profit or loss, of transaction costs that can be directly
attributed to the acquisition or the issuance of the financial
asset or the financial liability. Trade receivables that do not
contain a significant financing component are initially measured at
the price of the related transaction.
Financial assets - subsequent classification and measurement
A financial asset is measured at amortised cost if it meets the
two following cumulative conditions and is not designated for
measurement at fair value through profit or loss:
-- The objective of the entity's business model is to hold the
financial asset to collect the contractual cash flows; and
-- The contractual terms of the financial asset create
entitlement on specified dates to cash flows that are solely
payments of principal and interest on the principal amount
outstanding.
On initial recognition, financial assets that do not meet the
above criteria are classified to measurement at fair value through
profit or loss (FVTPL). Further, irrespective of business model
financial assets whose contractual cash flows are not solely
payments of principal and interest are accounted for at FVTPL. All
derivative financial instruments fall into this category, except
for those designated and effective as hedging instruments, for
which the hedge accounting requirements apply.
Financial assets are not reclassified in subsequent periods,
unless, and only to the extent that the Company changes its
business model for the management of financial debt assets, in
which case the affected financial debt assets are reclassified at
the beginning of the reporting period following the change in the
business model.
Financial assets at amortised cost
The Company has balances of trade and other receivables and
deposits that are held under a business model the objective of
which is collection of the contractual cash flows. The contractual
cash flows in respect of such financial assets comprise solely
payments of principal and interest that reflects consideration for
the time-value of the money and the credit risk. Accordingly, such
financial assets are measured at amortised cost.
In subsequent periods, these assets are measured at amortised
cost, using the effective interest method and net of impairment
losses. Interest income, currency exchange gains or losses and
impairment are recognised in profit or loss. Any gains or losses on
derecognition are also carried to profit or loss.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are
carried in the statement of financial position at fair value with
all gains and losses and net changes in fair value recognised in
the statement of comprehensive loss as financing income or cost.
This category includes derivative instruments (including embedded
derivatives that were separated from the host contract).
Financial liabilities - classification, subsequent measurement
and gains and losses
Financial liabilities are classified to measurement at amortised
cost or at fair value through profit or loss. All financial
liabilities are recognised initially at fair value and, in the case
of loans and borrowings and payables, net of directly attributable
transaction costs.
Financial liabilities are measured at amortised cost
This category include trade and other payables, loans and
borrowings including bank overdrafts. These financial liabilities
are measured at amortised cost in subsequent periods, using the
effective interest method. Interest expenses and currency exchange
gains and losses are recognised in profit or loss. Any gains or
losses on derecognition are also carried to profit or loss.
Amortised cost is calculated by taking into account any discount
or premium on acquisition and fees or costs that are an integral
part of the effective interest method. The effective interest
method amortisation is included as finance costs in profit or
loss.
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss are
measured at fair value, and any net gains and losses, including any
interest expenses, are recognised in profit or loss.
Financial liabilities at fair value through profit or loss
include financial liabilities held for trading and financial
liabilities designated upon initial recognition as at fair value
through profit or loss.
Financial liabilities are classified as held for trading if they
are incurred for the purpose of repurchasing in the near term. This
category also includes derivative financial instruments (including
warrants derivative liability related to warrants with exercise
price denominated in a currency other than the Company's functional
currency) entered into by the Company that are not designated as
hedging instruments in hedge relationships as defined by IFRS 9.
Separated embedded derivatives are also classified as held for
trading unless they are designated as effective hedging
instruments.
Financial liabilities designated upon initial recognition at
fair value through profit or loss are designated at the initial
date of recognition, and only if the criteria in IFRS 9 are
satisfied. The Company designated its liability to issue variable
number of shares which include certain embedded derivatives (such
as prepayment options) under share subscription agreement at fair
value through profit or loss (see Note 15).
2. Derecognition of financial liabilities
Financial liabilities are derecognised when the contractual
obligation of the Company expires or when it is discharged or
canceled. Additionally, a significant amendment of the terms of an
existing financial liability, or an exchange of debt instruments
having substantially different terms, between an existing borrower
and lender, are accounted for as an extinguishment of the original
financial liability and the recognition of a new financial
liability at fair value.
The difference between the carrying amount of the extinguished
financial liability and the consideration paid (including any other
non-cash assets transferred or liabilities assumed), is recognised
in profit or loss. In the event of a non-material modification of
terms (or exchange of debt instruments), the new cash flows are
discounted at the original effective interest rate and the
difference between the present value of financial liability under
the new terms and the present value of the original financial
liability is recognised in profit or loss.
3. Impairment
Financial assets and contract assets
The Company creates a provision for expected credit losses in
respect of:
-- Contract assets (as defined in IFRS 15).
-- Financial assets measured at amortised cost.
Expected credit losses are recognised in two stages. For credit
exposures for which there has not been a significant increase in
credit risk since initial recognition, expected credit losses are
provided for credit losses that result from default events that are
possible within the next 12-months. For those credit exposures for
which there has been a significant increase in credit risk since
initial recognition, a loss allowance is required for credit losses
expected over the remaining life of the exposure, irrespective of
the timing of the default (a lifetime expected credit losses).
The Company has elected to measure, if relevant, the provision
for expected credit losses in respect of trade receivables,
contract assets at an amount that is equal to the credit losses
expected over the life of the instrument.
In assessing whether the credit risk of a financial asset has
significantly increased since initial recognition and in assessing
expected credit losses, the Company takes into consideration
information that is reasonable and verifiable, relevant and
attainable at no excessive cost or effort. Such information
comprises quantitative and qualitative information, as well as an
analysis, based on the past experience of the Company and the
reported credit assessment, and contains forward-looking
information.
Measurement of expected credit losses
Expected credit losses represent a probability-weighted estimate
of credit losses. Credit losses are measured at the present value
of the difference between the cash flows to which the Company is
entitled under the contract and the cash flows that the Company
expects to receive.
Expected credit losses are discounted at the effective interest
rate of the financial asset.
4. Derivative financial instruments and hedge accounting
Derivative financial instruments 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 all of the following requirements:
-- there is an economic relationship between the hedged item and the hedging instrument
-- the effect of credit risk does not dominate the value changes
that result from that economic relationship, and
-- the hedge ratio of the hedging relationship is the same as
that resulting from the quantity of the hedged item that the entity
actually hedges and the quantity of the hedging instrument that the
entity actually uses to hedge that quantity of hedged item.
During the reported periods, the Company did not apply hedge
accounting.
Embedded derivatives
A derivative embedded in a hybrid contract, with a financial
liability or non-financial host, is separated from the host and
accounted for as a separate derivative if: the economic
characteristics and risks are not closely related to the host; a
separate instrument with the same terms as the embedded derivative
would meet the definition of a derivative; and the hybrid contract
is not measured at fair value through profit or loss. Embedded
derivatives
are measured at fair value with changes in fair value recognised
in profit or loss. Reassessment only occurs if there is either 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
category.
As described in Note 15.F.[3]., the Company has determined to
designate its liability with respect to share subscription
agreement which include several embedded derivatives in its
entirety at FVTPL category.
L. 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.
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 recognised over the vesting period, which is
the period over which all of the specified vesting conditions are
to be satisfied. At the end of each reporting period, an estimate
is made of the number of instruments expected to vest. No expense
is recognised for awards that do not ultimately vest because of
service conditions and/or if non-market performance conditions have
not been met. As an expense is recognised over the vesting period,
when an expense has been recorded in one period and the options are
cancelled in the following period, then the previously recorded
expenses for options that never vested, as reversed. Grants that
are contingent upon vesting conditions (including performance
conditions that are not market conditions) which are not ultimately
met are not recognised as an expense. A change in estimate
regarding prior periods is recognised in the statement of
comprehensive income over the vesting period. No expense is
recognised for award that do not ultimately vest because service
condition and/or non-market performance condition have not been
made.
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 capitalised to the cost of an
asset (if relevant), based on the nature of the transaction.
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. Maximising the use of relevant observable
inputs and minimising the use of unobservable inputs.
All assets and liabilities measured at fair value or for which
fair value is disclosed are categorised 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.
For assets and liabilities that are recognised in the financial
statements at fair value on a recurring basis, the Company
determines whether transfers have occurred between levels in the
hierarchy by re-assessing categorisation (based on the lowest level
input that is significant to the fair value measurement as a whole)
at the end of each reporting period.
For the purpose of fair value disclosures, the Company has
determined classes of assets and liabilities on the basis of the
nature, characteristics and risks of the asset or liability and the
level of the fair value hierarchy, as explained above.
Fair-value related disclosures for financial instruments that
are measured at fair value or where fair values are disclosed, are
summarised in note 26.
O. Transactions with controlling shareholders
Transactions with controlling shareholders are recognised at
fair value. Any difference between the fair value and the original
terms of the transaction, represent capital contribution or
dividend, as applicable and accordingly, carried to equity.
P. Revenue recognition
The Company generates revenues mainly from sales of programmable
devices ("FPGA") that embed intellectual property ("IP") developed
by the Company, or IP developed by the Company together with
software application tools, to assist its customers to design their
own systems based on the Company IP.
The Company recognises revenue when the customer obtains control
over the promised goods or services. The revenue is measured
according to the amount of the consideration to which the Company
expects to be entitled in exchange for the goods or services
promised to the customer.
Identification of the contract
The Company treats a contract with a customer only where all of
the following conditions are fulfilled.
1. The parties to the contract have approved the contract (in
writing, orally or according to other customary business practices)
and they are committed to satisfying their obligations
thereunder;
1. The Company is able to identify the rights of each party in
relation to the goods or services that are to be transferred;
2. The Company is able to identify the payment terms for the
goods or services that are to be transferred;
3. The contract has commercial substance (i.e., the entity's
risk, timing and amount of future cash flows are expected to change
as result of the contract); and
4. It is probable that the consideration to which the Company is
entitled to in exchange for the goods or services transferred to
the customer will be collected.
Identification of performance obligations
On the contract's inception date the Company assesses the goods
or services promised in the contract with the customer and
identifies as a performance obligation any promise to transfer to
the customer one of the following:
1. Goods or services that are distinct; or
2. A series of distinct goods or services that are substantially
the same and have the same pattern of transfer to the customer.
The Company identifies goods or services promised to the
customer as being distinct when the customer can benefit from the
goods or services on their own or in conjunction with other readily
available resources and the Company's promise to transfer the goods
or services to the customer separately identifiable from other
promises in the contract. In order to examine whether a promise to
transfer goods or services is separately identifiable, the Company
examines whether it is providing a significant service of
integrating the goods or services with other goods or services
promised in the contract into one integrated outcome that is the
purpose of the contract.
Determination of the transaction price
The transaction price is the amount of the consideration to
which the Company expects to be entitled in exchange for the goods
or services promised to the customer, other than amounts collected
for third parties. The Company takes into account the effects of
all the following elements when determining the transaction price;
variable consideration (see below), the existence of a significant
financing component, non-cash consideration, and consideration
payable to the customer.
Variable consideration
The transaction price includes fixed amounts and amounts that
may change as a result of discounts, credits, price concessions,
incentives, penalties, claims and disputes and contract
modifications where the consideration in their respect has not yet
been agreed to by the parties.
In accordance with the requirements in IFRS 15 on constraining
estimates of variable consideration, the Company includes the
amount of the variable consideration, or part of it, in the
transaction price at contract inception, only when it is considered
highly probable that its inclusion will not result in a significant
revenue reversal in the future when the uncertainty has been
subsequently resolved. At the end of each reporting period and if
necessary, the Company revises the amount of the variable
consideration included in the transaction price.
Satisfaction of performance obligations
Revenue is recognised when the Company satisfies a performance
obligation by transferring control over promised goods or services
to the customer, as applicable.
Contract costs
Incremental costs of obtaining a contract with a customer, such
as sales fees to agents, are recognised as an asset when the
Company is likely to recover these costs. Costs to obtain a
contract that would have been incurred regardless of the contract
are recognised as an expense as incurred unless the customer can be
billed for those costs.
Costs incurred to fulfill a contract with a customer and that
are not covered by another standard are recognised as an asset when
they: relate directly to a contract the Company can specifically
identify; they generate or enhance resources of the Company that
will be used in satisfying performance obligations in the future;
and they are expected to be recovered. In any other case the costs
are recognised as an expense as incurred.
Capitalised costs are amortised in profit or loss on a
systematic basis that is consistent with the pattern of transfer of
the goods or services to which the asset relates.
In every reporting period, the Company examines whether the
carrying amount of the asset recognised as aforesaid exceeds the
consideration the entity expects to receive in exchange for the
goods or services to which the asset relates, less the costs
directly attributable to the provision of these goods or services
that were not recognised as expenses, and if necessary, an
impairment loss is recognised in the profit or loss.
Contract modification
A contract modification is a change in the scope or price (or
both) of a contract that was approved by the parties to the
contract. A contract modification can be approved in writing,
orally or be implied by customary business practices.
When a contract modification has not yet been approved by the
parties, the Company continues to recognise revenues according to
the existing contract, while disregarding the contract
modification, until the date the contract modification is approved
or the contract modification is legally enforceable.
The Company accounts for a contract modification as an
adjustment of the existing contract since the remaining goods or
services after the contract modification are not distinct and
therefore constitute a part of one performance obligation that is
partially satisfied on the date of the contract modification. The
effect of the modification on the transaction price and on the rate
of progress towards full satisfaction of the performance obligation
is recognised as an adjustment to revenues (increase or decrease)
on the date of the contract modification, meaning on a catch-up
basis.
Sales of goods
Revenues from sale of programmable devices are recognised at the
point in time when control of the asset is transferred to the
customer, generally upon delivery of the devices.
Certain contracts provide a customer with a right to return the
goods within a specified period. The Company uses the expected
value method to estimate the goods that will not be returned
because this method best predicts the amount of variable
consideration to which the Company will be entitled. The
requirements in IFRS 15 on constraining estimates of variable
consideration are applied with respect to arrangements that
provides such right of return, in order to determine the amount of
variable consideration that can be included in the transaction
price. Accordingly, the Company recognise amounts subject to right
of return only if it is highly probable that there will not be a
significant reversal of revenues if the estimate of expected
returns changes. As of December 31, 2019 and 2020, there was no
significant amount of goods that were subject to right of
return.
Contracts with milestone payments
Certain contracts with major customers are structured to provide
the Company with payment upon the achievements of certain
predefined milestones which might include development of new
product offerings ore new features of existing products such as
programmable devices ("design tools").
Management has determined that the performance obligations under
such arrangements which are generally based on separate milestones,
are recognised at the point in time when control of such separate
milestone is transferred to the customer, generally upon completion
of the related milestone.
Amounts received (including up-front payments), which relate to
milestones that were non achieved yet, are deferred and presented
as deferred revenues.
Multiple element transactions
Some of the Company's contracts with customers contain multiple
performance obligations. For these contracts, the Company account
for individual performance obligations separately if they are
distinct. The transaction price is allocated to the separate
performance obligations on a relative standalone selling price
basis. The Company determine the standalone selling prices based on
an overall pricing objectives, taking into consideration market
conditions and other factors.
Revenues are then recognised for each separate performance
obligations - sales of goods or designed tools, based on the
criteria described in the above paragraph.
Revenue from royalties
The Company is entitled to royalties based on sales performed by
third parties of products which consist of IP developed by the
Company.
For arrangements that include such sales-based royalties,
including milestone payments based on the level of sales, and the
license of the IP developed by the company is deemed to be the
predominant item to which the royalties relate, the Company
recognises revenue at the later of (i) when the performance
obligation to which some or all of the royalty has been allocated
has been satisfied (or partially satisfied), or (ii) when the
related sales occur.
Accordingly, revenues from royalties are recognised based on the
actual sales of products as reported to the Company on a quarterly
basis.
Q. Income taxes
Taxes on income in the statement of comprehensive loss comprises
the sum of deferred taxes and current taxes (when applicable).
Deferred taxes are recognised in the statement of comprehensive
income, except to the extent that the tax arises from items which
are recognised directly in other comprehensive income or in equity.
In such cases, the tax effect is also recognised in the relevant
item.
Deferred tax assets are recognised to the extent that it is
probable that the underlying tax loss or deductible temporary
difference will be utilised against future taxable income. This is
assessed based on the Company's forecast of future operating
results, adjusted for significant non-taxable income and expenses
and specific limits on the use of any unused tax loss or credit.
See also Note 2 4 .
Deferred tax assets are presented in the statement of financial
position as non-current assets.
R. Operating cycle
The normal operating cycle of the Company is a twelve-month
period ending in December 31 of each year.
S. Impairment testing of other intangible assets and property and equipment
For impairment assessment purposes, assets are grouped at the
lowest levels for which there are largely independent cash inflows
(cash-generating units). As a result, some assets are tested
individually for impairment, and some are tested at cash-generating
unit level.
An impairment loss is recognised for the amount by which the
asset's (or cash-generating unit's) carrying amount exceeds its
recoverable amount, which is the higher of fair value less costs of
disposal and value-in-use. To determine the value-in-use,
management estimates expected future cash flows from each asset or
cash-generating unit and determines a suitable discount rate, in
order to calculate the present value of those cash flows. The data
used for impairment testing procedures are directly linked to the
Company's latest approved budget, adjusted as necessary to exclude
the effects of future reorganisations and asset enhancements.
Discount factors are determined individually for each
cash-generating unit assets and reflect current market assessments
of the time value of money and asset-specific risk factors, see
also Note 10.
T. Ordinary shares
Ordinary shares issued by the Company which do not meet the
definition of financial liability or financial asset, were
recognised as part of equity on the basis of the consideration
received in respect thereof, net of costs attributed directly to
the issue.
U. Equity and reserves
Share capital represents the nominal par value of shares that
have been issued.
Share premium includes any premiums received on issue of share
capital. Any transaction costs associated with the issuing of
shares are deducted from share premium, net of any related income
tax benefits.
V. Provisions, contingent assets and contingent liabilities
Provisions for legal disputes, onerous contracts or other claims
are recognised when the Company has a present legal or constructive
obligation as a result of a past event, it is probable that an
outflow of economic resources will be required to settle the
obligation and amounts can be estimated reliably. Timing or amount
of the outflow may still be uncertain.
No liability is recognised if an outflow of economic resources
as a result of present obligations is not probable. Such situations
are disclosed as contingent liabilities unless the outflow of
resources is remote.
Provisions are measured at the estimated expenditure required to
settle the present obligation, based on the most reliable evidence
available at the reporting date, including the risks and
uncertainties associated with the present obligation. Where there
are a number of similar obligations, the likelihood that an outflow
will be required in settlement is determined by considering the
class of obligations as a whole. Provisions are discounted to their
present values, where the time value of money is material.
Any reimbursement that the Company is virtually certain to
collect from a third party with respect to the obligation is
recognised as a separate asset. However, this asset may not exceed
the amount of the related provision.
W. Leased assets
The Company has applied IFRS 16 from 1 January 2019 using the
modified retrospective approach. Under this approach the cumulative
effect of initially applying IFRS 16 is recognised as an adjustment
to equity at the date of initial application.
For any new contracts entered into on or after 1 January 2019,
the Company considers whether a contract is, or contains a lease. A
lease is defined as 'a contract, or part of a contract, that
conveys the right to use an asset (the underlying asset) for a
period of time in exchange for consideration'. To apply this
definition the Company assesses whether the contract meets three
key evaluations which are whether:
-- the contract contains an identified asset, which is either
explicitly identified in the contract or implicitly specified by
being identified at the time the asset is made available to the
Company
-- the Company has the right to obtain substantially all of the
economic benefits from use of the identified asset throughout the
period of use, considering its rights within the defined scope of
the contract
-- the Company has the right to direct the use of the identified
asset throughout the period of use. The Company assesses whether it
has the right to direct 'how and for what purpose' the asset is
used throughout the period of use.
Measurement and recognition of leases as a lessee
At lease commencement date, the Company recognises a
right-of-use asset and a lease liability on the balance sheet. The
right-of-use asset is measured at cost, which is made up of the
initial measurement of the lease liability, any initial direct
costs incurred by the Company, an estimate
of any costs to dismantle and remove the asset at the end of the
lease, and any lease payments made in advance of the lease
commencement date (net of any incentives received).
The Company depreciates the right-of-use assets on a
straight-line basis from the lease commencement date to the earlier
of the end of the useful life of the right-of-use asset or the end
of the lease term. The Company also assesses the right-of-use asset
for impairment when such indicators exist.
At the lease commencement date, the Company measures the lease
liability at the present value of the lease payments unpaid at that
date, discounted using the interest rate implicit in the lease if
that rate is readily available or the Company's incremental
borrowing rate.
Lease payments included in the measurement of the lease
liability are made up of fixed payments (including in substance
fixed), variable payments based on an index or rate, amounts
expected to be payable under a residual value guarantee and
payments arising from options reasonably certain to be
exercised.
Subsequent to initial measurement, the liability is reduced for
payments made and increased for interest. It is re-measured to
reflect any reassessment or modification, or if there are changes
in in-substance fixed payments.
When the lease liability is re-measured, the corresponding
adjustment is reflected in the right-of-use asset, or profit and
loss if the right-of-use asset is already reduced to zero.
The Company has elected to account for short-term leases and
leases of low-value assets using the practical expedients. Instead
of recognising a right-of-use asset and lease liability, the
payments in relation to these are recognised as an expense in
profit or loss on a straight-line basis over the lease term.
On the statement of financial position, right-of-use assets have
been included under non-current assets and the current portion of
lease liabilities have been included in other current
liabilities.
X. New or revised Standards or Interpretations
New Standard adopted as at 1 January 2020
Amendments to IAS 1 and IAS 8 Definition of Material
The amendments provide a new definition of material that states,
"information is material if omitting, misstating or obscuring it
could reasonably be expected to influence decisions that the
primary users of general purpose financial statements make on the
basis of those financial statements, which provide financial
information about a specific reporting entity." The amendments
clarify that materiality will depend on the nature or magnitude of
information, either individually or in combination with other
information, in the context of the financial statements. A
misstatement of information is material if it could reasonably be
expected to influence decisions made by the primary users. These
amendments had no impact on the financial statements of, nor is
there expected to be any future impact to the Company.
Conceptual Framework for Financial Reporting issued on 29 March
2018
The Conceptual Framework is not a standard, and none of the
concepts contained therein override the concepts or requirements in
any standard. The purpose of the Conceptual Framework is to assist
the IASB in developing standards, to help preparers develop
consistent accounting policies where there is no applicable
standard in place and to assist all parties to understand and
interpret the standards. This will affect those entities which
developed their accounting policies based on the Conceptual
Framework. The revised Conceptual Framework includes some new
concepts, updated definitions and recognition criteria for assets
and liabilities and clarifies some important concepts. These
amendments had no impact on the financial statements of the
Company.
Some other accounting pronouncements which have become effective
from 1 January 2020 and have therefore been adopted do not have a
significant impact on the Company's financial results or
position.
Standards, amendments and Interpretations to existing Standards
that are not yet effective and have not been adopted early by the
Partnership
Amendments to IAS 1: Classification of Liabilities as Current or
Non-current
In January 2020, the IASB issued amendments to paragraphs 69 to
76 of IAS 1 to specify the requirements for classifying liabilities
as current or non-current. The amendments clarify:
-- What is meant by a right to defer settlement
-- That a right to defer must exist at the end of the reporting
period
-- That classification is unaffected by the likelihood that an
entity will exercise its deferral right
-- That only if an embedded derivative in a convertible
liability is itself an equity instrument would the terms of a
liability not impact its classification
The amendments are effective for annual reporting periods
beginning on or after 1 January 2023 and must be applied
retrospectively. The Partnership is currently assessing the impact
the amendments will have on current practice and whether existing
loan agreements may require renegotiation.
IFRS 9 Financial Instruments - Fees in the '10 per cent' test
for derecognition of financial liabilities
As part of its 2018-2020 annual improvements to IFRS standards
process the IASB issued amendment to IFRS 9. The amendment
clarifies the fees that an entity includes when assessing whether
the terms of a new or modified financial liability are
substantially different from the terms of the original financial
liability. These fees include only those paid or received between
the borrower and the lender, including fees paid or received by
either the borrower or lender on the other's behalf. An entity
applies the amendment to financial liabilities that are modified or
exchanged on or after the beginning of the annual reporting period
in which the entity first applies the amendment. The amendment is
effective for annual reporting periods beginning on or after 1
January 2022 with earlier adoption permitted.
The Partnership will apply the amendments to financial
liabilities that are modified or exchanged on or after the
beginning of the annual reporting period in which the entity first
applies the amendment. The amendments are not expected to have a
material impact on the Partnership.
Other Standards and amendments that are not yet effective and
have not been adopted early by the Partnership include:
-- IFRS 17 Insurance Contracts
-- Amendments to IFRS 17 Insurance Contracts (Amendments to IFRS
17 and IFRS 4)
-- References to the Conceptual Framework
-- Proceeds before Intended Use (Amendments to IAS 16)
-- Onerous Contracts - Cost of Fulfilling a Contract (Amendments
to IAS 37)
-- Annual Improvements to IFRS Standards 2018-2020 Cycle
(Amendments to IFRS 1, IFRS 9, IFRS 16, IAS 41)
These amendments are not expected to have a significant impact
on the financial statements in the period of initial application
and therefore the disclosures have not been made.
NOTE 4 - 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 (if relevant), management monitors whether the
recognition requirements continue to be met and whether there are
any indicators that capitalised costs may be impaired (see Note
10). Commencing 1 July 2019, the Company ceased to capitalise
development expenses.
Estimation uncertainty
-- Impairment of non-financial assets
In assessing impairment of non-financial assets (primarily,
internally developed intangible assets - see Note 10), management
estimates the recoverable amount of each asset or cash generating
units (if relevant) 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 capitalised development expenses
recognised as an intangible asset) at each reporting date, based on
the expected utility of the assets. Uncertainties in these
estimates relate to technological obsolescence that may change the
utility of certain intangible assets (see Notes 9 and 10).
-- Fair value measurement of employees' options and warrants issued to shareholders
Management uses valuation techniques to determine the fair value
of employees' options and shareholder' warrants. 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 Note 16).
-- Fair value measurement of financial instruments
When the fair values of financial assets and financial
liabilities recorded in the statement of financial position cannot
be measured based on quoted prices in active markets, Management
uses various valuation techniques to determine the fair value of
such financial instruments 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. Changes in assumptions relating to these
factors could affect the reported fair value of financial
instruments (see Note 15).
NOTE 5 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
US dollars
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31 December
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2020 2019
------------------ ---------
In Sterling 1,651,352 36,780
In U.S. Dollar 153,045 41,491
In Euro 4,223 3,862
In New Israeli Shekel 372,106 1,034,789
2,180,726 1,116,922
================== =========
NOTE 6 - OTHER SHORT-TERM FINANCIAL ASSETS
Other short-term financial assets consist of the following:
US dollars
---------------
31 December
---------------
2020 2019
---- ---------
12 month deposit - 2,500,000
Accrued interest (annual interest rate of 2.68%) - 53,823
- 2,553,823
==== =========
NOTE 7 - TRADE RECEIVABLES
Trade and other receivables consist of the following:
US dollars
---------------------------
31 December
---------------------------
2020 2019
---------------- ---------
Trade receivables 838,920 399,404
Unbilled revenue 89,141 102,758
Less: provision for expected credit losses (150,000) (75,000)
Total receivables 778 ,061 427,162
================ =========
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 the possibility of loss (an allowance for impairment losses).
See also Note 26A.
NOTE 8 - OTHER CURRENT ASSETS
Other current assets consist of the following:
US dollars
---------------------------
31 December
---------------------------
2020 2019
------------------ -------
Prepaid Expenses 170,547 244,553
Deferred expenses related to share subscription
agreement facility - see Note 15.F.[3] 66,709 -
Deposits to suppliers 8,769 9,108
Government institutions 33,397 100,350
Other current assets 45,610 8,780
Proceeds due on account of shares issued
- see Notes 15.F.[4] and 26.B. 301,658 -
Total other current assets 626,690 362,791
================== =======
NOTE 9 - PROPERTY AND EQUIPMENT
Details of the Company's property and equipment are as
follows:
US dollars
----------------------------------------------------------------
Testing Furniture Leasehold
equipment Computers and equipment improve-ments Total
---------- --------- -------------- -------------- ---------
Gross carrying
amount
Balance 1 January
2020 552,342 242,113 75,846 60,102 930,403
Additions 184,323 2,923 611 - 187,857
Disposals (11,367) (103,471) (30,829) - (145,667)
---------- --------- -------------- -------------- ---------
Balance 31 December
2020 725,298 141,565 45,628 60,102 972,593
Depreciation
Balance 1 January
2020 (136,740) (195,377) (33,140) (39,604) (404,861)
Disposals 11,367 102,647 26,378 - 140,392
Depreciation (89,930) (41,539) (6,293) (18,250) (156,012)
---------- --------- -------------- -------------- ---------
Balance 31 December
2020 (215,303) (134,269) (13,055) (57,854) (420,481)
Carrying amount
31 December 2020 509,995 7,296 32,573 2,248 552,112
========== ========= ============== ============== =========
US dollars
---------------------------------------------------------------------
Testing Furniture Leasehold
equipment Computers and equipment improve-ments Total
----------- ----------- -------------- -------------- -----------
Gross carrying
amount
Balance 1 January
2019 486,709 237,826 74,284 60,102 858,921
Additions 65,633 4,287 1,562 - 71,482
----------- ----------- -------------- -------------- -----------
Balance 31 December
2019 552,342 242,113 75,846 60,102 930,403
Depreciation
Balance 1 January
2019 (58,126) (149,798) (26,522) (18,418) (252,864)
Depreciation (78,614) (45,579) (6,618) (21,186) (151,997)
----------- ----------- -------------- -------------- -----------
Balance 31 December
2019 (136,740) (195,377) (33,140) (39,604) (404,861)
Carrying amount
31 December 2019 415,602 46,736 42,706 20,498 525,542
=========== =========== ============== ============== ===========
NOTE 10 - INTANGIBLE ASSET
Details of the Company's intangible asset is as follows:
US dollars
----------
Total
----------
Gross carrying amount
Balance 1 January 2020 9,648,501
Disposals -
Other adjustment (*() (97,844)
Balance 31 December 2020 9,550,657
Amortisation
Balance 1 January 2020 1,212,491
Amortisation 952,606
----------
Balance 31 December 2020 2,165,097
Carrying amount 31 December
2020 7,385,560
==========
( *() Relates to a $97,844 reversal of share based compensation,
capitalised in prior years - see Note 16.A.
US dollars
----------
Total
----------
Gross carrying amount
Balance 1 January 2019 7,347,554
Additions (*) ( **() 2,300,947
Balance 31 December 2019 9,648,501
Amortisation
Balance 1 January 2019 477,739
Amortisation 734,752
----------
Balance 31 December 2019 1,212,491
Carrying amount 31 December
2019 8,436,010
==========
( *() The additions include $62,388 of share based
compensation.
( **() As described in Note 3.I. applicable development costs
were capitalised and were recognised as intangible assets. However,
as the Company did not meet all the measurement criteria of IAS 38,
the Company ceased to capitalise development costs commencing the
second half of 2019.
The Company commissioned an impairment test of the capitalised
intangible assets as of 31 December 2019, by a top-tier independent
international firm with expertise in valuation procedures.
According to such independent report, the recoverable amount of
these intangible assets is approximately USD 27 million - more than
three times the book value and accordingly there has been no need
to record an impairment to such capitalised assets.
The Company tested the capitalised intangible assets for
impairment as of 31 December 2020. Such analysis revealed a similar
calculation as that determined as at 31 December 2019 and therefore
no impairment is warranted.
In establishing its indications, the Company referred to the
fact that the 2019 independent report placed a value of $27m on the
intangible asset. Having given due thought to the following, the
Company believes that no further impairment is required.
-- The market forecasts for 2020, 2021 and 2022 which are $2m, $6m and $9m respectively;
-- The anticipated outcomes of current discussions and engagements with customers;
-- The customer projections and where the customer believes
engagement, testing, field trials and deployment will take
place;
-- Signed engagements or commercial discussion phases and anticipated outturns;
-- Development resources required to meet all of the above (I
remind you this is a Development Company that is now in a new
market of NFV which is being driven by 5G, connectivity and other
solutions that the Company has developed over the past 17 years and
the market is NOW engaging fully on);
-- Development cost elements (R&D resources);
-- Cash resources required to meet the forecast costs for the developments;
-- Current cash resources at the time;
-- Requirements if any for raising funds to ensure funds are freely available;
-- Ease of fund raising.
The valuation method determined, to best reflect the fair value
of the intangible assets, was the Multi-period Excess Earning
("MEEM") to be generated from such assets between 2020 through
2029.
The primary assumptions used in determining the fair value of
these intangible assets are as follows:
-- Corporate tax rate for the Company remains at 23%.
-- The pre-tax discount rate used to value future cash flows is 30.6% (post-tax 25%).
NOTE 11 - LEASES
A. Details of the Company's operating lease right of use assets are as follows:
US dollars
---------------------------------
Buildings Vehicles Total
---------- --------- ----------
Gross carrying amount
Balance 1 January 2020 441,068 129,742 570,810
Additions - - -
---------- --------- ----------
Balance 31 December 2020 441,068 129,742 570,810
Accumulated depreciation
Balance 1 January 2020 (112,614) (10,115) (122,729)
Depreciation expense (112,614) (43,248) (155,862)
---------- --------- ----------
Balance 31 December 2020 (225,228) (53,363) (278,591)
Total right-of-use assets as
at 31 December 2020 215,840 76,379 292,219
========== ========= ==========
US dollars
------------------------------------
Buildings Vehicles Total
----------- ---------- -----------
Gross carrying amount
Balance 1 January 2019 - - -
IFRS 16 adoption 441,068 - 441,068
Additions - 129,742 129,742
----------- ---------- -----------
Balance 31 December 2019 441,068 129,742 570,810
Accumulated depreciation
Balance 1 January 2019 - - -
Depreciation expense (112,614) (10,115) (122,729)
----------- ---------- -----------
Balance 31 December 2019 (112,614) (10,115) (122,729)
Total right-of-use assets as
at 31 December 2019 328,454 119,627 448,081
=========== ========== ===========
The vehicle right-of-use assets comprises 4 vehicles used by
employees, all of which lease terms extend until the second half of
2022.
B. Lease liabilities are presented in the statement of financial position as follows:
US dollars
------------------
31 December
------------------
2020 2019
-------- --------
Current 160,653 151,648
Non-current 146,130 306,783
-------- --------
306,783 458,431
======== ========
C. In December 2017, the Company committed to a three-year lease
agreement for its primary offices in the Industrial area of Lod,
Israel. At the termination of the lease, the Company had an option
to renew it for a further two years. Such renewal option was
considered as reasonably certain to be exercised upon adoption of
IFRS 16 and was in fact exercised. 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. With the exception
of short-term leases and leases of low-value underlying assets (the
parking bay leases), each lease is reflected on the balance sheet
as a right-of-use asset and a lease liability.
Each lease generally imposes a restriction that, unless there is
a contractual right for the Company to sublet the asset to another
party, the right-of-use asset can only be used by the Company.
Leases are either non-cancellable or may only be cancelled by
incurring a substantive termination fee. Some leases contain an
option to extend the lease for a further term or for the employee
who used the leased item, to purchase the underlying leased asset
outright at the end of the lease term. The Company is prohibited
from selling or pledging the underlying leased assets as security.
For leases over office buildings and factory premises the Company
must keep those properties in a good state of repair and return the
properties in their original condition at the end of the lease.
Further, the Company must insure items of property, plant and
equipment and incur maintenance fees on such items in accordance
with the lease contracts.
D. The lease liabilities are secured by the related underlying
assets. Future minimum lease payments at 31 December 2020 were as
follows:
Minimum lease payments due
-------------------------------
US dollars
-------------------------------
2021 2022 Total
--------- --------- ---------
Lease payments 170,049 149,013 319,062
Finance charges (9,396) (2,883) (12,279)
--------- --------- ---------
Net present values 160,653 146,130 306,783
========= ========= =========
E. Lease payments not recognised as a liability.
The Company has elected not to recognise lease liabilities for
leases of low value assets (parking bays). Payments made under such
leases are expensed on a straight-line basis. The expense for the
year ended 31 December 2020, relating to payments not included in
the measurement of the lease liability is $12,219.
NOTE 12 - SHORT- TERM BORROWINGS
Borrowings include the following financial liabilities:
Annual
% Interest US dollars
---------------------------
rate(1) 31 December
---------------------------
2020 2020 2019
----------- ---------------- ---------
Bank borrowings (1) 6.2% 411,726 1,012,731
Total short- term borrowings 411,726 1,012,731
================ =========
(1) The loans bore variable interest of 6.2% (3.3% in 2019). The
above interest rate is the weighted average rate as of 31 December
2020. The loan was fully repaid by April 2021.
(2) The Company has an unused credit facility of 100,000 NIS
($31,104). I n addition, the Company has obtained a facility for
invoice trade financing of up to $430,000 which will allow
acceleration of cash flows on invoicing receipts.
NOTE 13 - OTHER CURRENT LIABILITIES
Other short-term liabilities consist of:
US dollars
-----------------------------
31 December
-----------------------------
2020 2019
----------------- ----------
Salaries, wages and related costs 344,352 318,235
Provision for vacation 246,289 159,898
Accrued expenses and other 112,669 70,472
Deferred revenue 28,500 *23,334
Short term lease liability 160,653 151,648
Related parties (see Note 28.A.) ** 383,386 402,420
Total other short-term liabilities 1,275,849 1,12 6,007
================= ==========
* This deferred revenue was recognised over 12 months commencing from August 2019.
** Relates to compensation from prior years. These amounts do
not bear interest. This liability was partially settled in May
2021.
NOTE 14 - IIA ROYALTY LIABILITY
During the years 2005 through 2012, the Company received grants
from the Israel Innovation Authority ("IIA") totaling approximately
$3.05 million, to support the Company's various research and
development programs. The Company is required to pay royalties to
the IIA at a rate of 3.5%, of the Company revenue up to an amount
equal to the grants received, plus interest from the date of the
grant. The total amount including interest is approximately $2.9
million. However, as the company is not expecting to produce
revenues from products funded by such grants it was determined that
there is reasonable assurance that the amount received will not be
refunded and thus no liability was recognised with respect to such
grants as of December 31, 2020 and 2019. Such contingent obligation
has no expiration date.
As at 31 December 2020, the Company has repaid approximately
$526,500 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 $2,900,000 as at 31 December 2020.
NOTE 15 - EQUITY
A. Details regarding share capital and number of shares at 31
December 2020 and at 31 December 2019 are:
Share capital:
US dollars
-------------
31 December
-------------
2020 2019
------ -----
Ordinary shares of NIS 0.001 par value 12,495 8,039
Total share capital 12,495 8,039
====== =====
Number of shares:
31 December
------------------------
2020 2019
----------- -----------
Ordinary shares of NIS 0.001 par value
- authorised 100,000,000 50,000,000
----------- -----------
Ordinary shares of NIS 0.001 par value
- issued and paid up 47,468,497 32,556,686
----------- -----------
In the first half of 2017, prior to the IPO, the Company
effected a 10:1 share split of all its authorised 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%. The
shareholder extraordinary general meeting held on 22 June 2020,
approved that the authorised share capital be increased from 50
million shares to 100 million shares.
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. Share premium
Share premium includes proceeds received from the issuance of
shares, after allocating the nominal value of the shares issued to
share capital. Transaction costs associated with the issuance of
shares are deducted from the share premium, net of any related
income tax benefit. The costs of issuing new shares charged to
share premium during the year ended 31 December 2020 was $134,736
(2019: zero).
D. Other components of equity
Other components of equity include the value of equity-settled
share and option-based payments provided to employees and
consultants. When employees and consultants forfeit their options,
the costs related to such forfeited options are reversed out to
share premium - see Note 16.A.
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 that existed as of that date were
mandatorily converted into ordinary shares on a 1:1 basis. The
Company trades on the AIM Stock Exchange under the symbol
"ENET".
Concurrent with the IPO, the Company issued 162,591 five-year
options to the IPO broker that may be exercised at an exercise
price of GBP 1.40 (see Note 16.C.) The Company's last share price
as at 31 December 2020 was GBP 0.36 (2019: GBP 0.44). These options
have not yet been exercised.
F. Shares issued during the accounting periods
During the year ended 31 December 2020, 14,911,811 (2019: zero)
shares were issued, as follows:
Number of
ordinary
Note shares
------ -----------
Exercise of employee options [1] 338,000
Issuance of ordinary shares )issued
together with warrants( [2] 7,333,334
Exercise of warrants [2] 3,744,426
Shares issued pursuant to share
subscription agreement [3] 2,466,051
Shares issued, not yet paid for [4] 880,000
Expenses paid for in shares and
warrants [5] 150,000
-----------
14,911,811
===========
[1] Details of shares issued to an employee and a former
employee, upon the exercise of their employee options, are as
follows:
Exercise
price of Number of
Date options exercised options shares issued
22 January 2020 $0.10 138,000
14 August 2020 $0.10 200,000
---------------
338,000
===============
The amount received by the Company upon the exercise of these
options was $ 33,800 - see Note 16.A. for further details related
to the employee options.
[2] In July 2020 the Company issued 7,333,334 shares attached to
7,333,334 warrants. Every 2 shares and the attached 2 warrants were
issued for GBP 0.24 (GBP 0.12 per share and attached warrant),
realising gross proceeds of $1,103,069 (GBP 880,000) and net
proceeds after issuance expenses of approximately $999,000 (GBP
827,500).
Every 2 warrants were comprised of 1 warrant exercisable at GBP
0.20 ("GBP 0.20 warrants") and 1 warrant exercisable at GBP 0.30
("GBP 0.30 warrants"), both with a life term of 12 months. The
warrants are not transferable and are not traded on an exchange.
The warrants have an accelerator clause. The GBP 0.20 warrants will
be callable by the Company if the closing mid-market share price of
the Company exceeds GBP 0.30 over a 5-consecutive day period. The
GBP 0.30 warrants will be callable by the Company if the closing
mid-market share price of the Company exceeds GBP 0.40 over a
5-consecutive day period. If such 5-consecutive day period
condition is met, the Company may serve notice on the warrant
holders to exercise their relevant warrants within 7 calendar days,
failing which, such remaining unexercised warrants shall be
cancelled.
As the exercise price of the warrants is denominated in GBP and
not in the Company's functional currency, it was determined that
the Company's obligation under such warrants cannot be considered
as an obligation to issue a fixed number of equity instruments in
exchange for a fixed amount of cash. Accordingly, it was determined
that such warrants represent a derivative financial liability
required to be accounted for at fair value through the profit or
loss category. Upon initial recognition the Company allocated the
gross proceeds as follows: an amount of approximately $82,000 was
allocated as derivative warrants liability with the remainder of
the proceeds amounting to $917,000 (after deduction of the
allocated issuance costs of $104,000) being allocated to share
capital and share premium. The issuance expenses were allocated in
a consistent manner to the above allocation. The expenses related
to the warrant component were carried to profit or loss as an
immediate expense while the expenses related to the share capital
component were netted against the amount carried to equity. In
subsequent periods the company measures the derivative financial
liability at fair value and the periodic changes in fair value are
carried to profit or loss under financing costs or financing
income, as applicable. The fair value of the derivative warrant
liability is categorised as level 3 of the fair value
hierarchy.
The fair value valuation of the warrants was based on the
Black-Scholes option pricing model, calculated in two stages.
Initially, the fair value of these call warrants issued to
investors were calculated, assuming no restrictions applied to such
call warrants. As the Company, under certain circumstances, has a
right to force the investors to either exercise their warrants or
have them cancelled, The second calculation calculates the value of
the warrants as call warrants that were issued by the investor to
the company. The net fair value results from reducing the call
investor warrants fair value from the call warrants fair value, as
long as the intrinsic value of the call warrants (share price at
year end less exercise price of the warrants) is not greater than
such value. Should the intrinsic value of the warrants be higher
than the Black-Scholes two stage method described above, then the
intrinsic value of the warrants is considered to be a more accurate
measure to use in determining the fair value. The following factors
were used in calculating the fair value of the warrants at their
issuance:
Trigger
Exercise price
price Risk for call
Share price for call free investor
Instrument Term at issuance warrants rate Volatility warrants
0.20p option 1 year GBP 0.135 GBP 0.20 0.16% 66.3% GBP 0.30
0.30p option 1 year GBP 0.134 GBP 0.30 0.17% 66.3% GBP 0.40
Of the 7,333,334 shares and 7,333,334 warrants subscribed for,
the directors' participation in this issuance was 1,666,668 shares,
833,334 GBP 0.20 warrants and 833,334 GBP 0.30 warrants, on the
same terms as outside investors participated.
During December 2020, the accelerator clause for the GBP 0.20
warrants had been activated by the Company and 3,491,676 of these
warrants were exercised for which the Company issued the same
number of shares, while 174,991 warrants not exercised were
cancelled in terms of the Warrant Instrument. The Directors
exercised all their GBP 0.20 warrants held.
None of the GBP 0.30 warrants had been exercised by 31 December
2020 and their fair value of $286,253 at such date is disclosed as
a warrants liability in the statement of financial position. The
intrinsic value of the GBP 0.30 warrants is higher than the fair
value calculated using the Black-Scholes two stage method described
above. Accordingly, these warrants are fair valued at their
intrinsic value, being GBP 0.06 per warrant (GBP 0.36 share price
at 31 December 2020 less the GBP 0.30 exercise price).
Upon this successful equity raise being concluded in July 2020,
the broker for this transaction received 252,750 one-year warrants
exercisable at GBP 0.12 per warrant ("Broker Warrants"). The
fair-value of these warrants at the time of issuance was
approximately $13,000. As at 31 December 2020, all these warrants
have been exercised. See Note 16.D.
The total amount received by the Company upon the exercise of
the GBP 0.20 warrants and the Broker Warrants was approximately $
993,000. Such amount, together with the fair value of the warrants
derivative liability was recognised within the equity upon exercise
of the warrants totaling an amount of $1,633,385.
In May 2021 the accelerator clause for the GBP 0.30 warrants was
activated by the Company and 3,500,000 of these warrants were
exercised, for which the Company issued the same number of shares,
while 166,667 warrants not exercised, were cancelled - see Note
30.5.
[3] On 24 September 2020 the Company entered into a share
subscription deed / agreement ("SSD") with an institutional
investor ("Investor"), to raise up to GBP 3,200,000 (Approx.
$4,100,000) as follows:
Amount Date that
Subscription receivable amount was
Closing Closing date amount by Company received
1(st) Up to 5 business days
following execution 25 Sep.
of the SSD GBP 547,000 GBP 500,000 2020
2(nd) Up to 240 calendar
days following the 31 Dec.
1(st) closing date GBP 438,000 GBP 400,000 2020
-------------- --------------
Amounts received until
31 December 2020 GBP 985,000 GBP 900,000
3(rd) Up to 240 calendar
days following the
2(nd) closing date GBP 438,000 GBP 400,000 4 Mar. 2021
4(th) Up to 240 calendar
days following the 16 Apr.
3(rd) closing date GBP 438,000 GBP 400,000 2021
Subsequent By mutual agreement GBP 1,647,000 GBP 1,500,000 *
-------------- --------------
GBP 3,508,000 GBP 3,200,000
============== ==============
* GBP 750,000 of the GBP 1,500,000 was received on 30 April
2021.
According to the subscription agreement, the company is entitled
to terminate the agreement (with respect to any subscription amount
not yet closed), upon payment of a cancellation fee of $48,000.
Pursuant to the share subscription agreement, the investor has
the right, at its sole discretion to require the Company to issue
shares in relation to the subscription amount outstanding (or a
part of it), under which, the number of shares to be issued for
such settlement, shall be determined using an average five daily
VWAP share price of the Company's shares as selected by the
Investor, during the 20 trading days prior to such settlement
notice ("Conversion Price"). However, the company has certain
rights to make cash payments in lieu of the above share settlement,
however the Investor is entitled to exclude from such cash payment,
up to 30% of the cash settlement amount.
As the company's obligation under the share subscription
agreement with respect for each subscription amount received by the
company, represent an obligation to be settled through the issuance
of variable number of shares and as the agreements include several
embedded derivatives (such as early prepayment options, principal
amounts indexed to an average price of equity instrument) the
company has designated this obligation as financial liability at
fair value through profit or loss under "liability related to share
subscription agreement".
Accordingly, upon initial recognition and at each reporting
period the liability is measured at fair value with changes carried
to profit or loss under financing costs or financing income, as
applicable.
Upon settlement or a partial settlement of such liability, such
when the investor calls for the settlement of the aggregate
subscription amount outstanding (or any part of it), for a fixed
number of shares, as calculated upon such settlement notice, the
fair value of the liability, related to the settled portion is
carried to equity.
The fair value of the liability related to share subscription
agreement is categorised as level 3 of the fair value hierarchy.
See Note 26.B. As at 31 December 2020, this liability was comprised
of:
Total fair value
of liability
Fair value
of 30% portion
70% of that Investor
Unconverted which could can convert
portion be repaid into shares
of subscription by the at Conversion
Closing amount Company Price GBP USD
1(st) GBP 107,000 GBP 74,900 GBP 46,104 GBP 121,004 $ 165,299
2(nd) GBP 438,000 GBP 306,600 GBP 188,724 GBP 495,324 $ 676,645
----------
$ 841,944
==========
The Investor paid $648,417 (GBP 500,000) to the Company by
subscribing for an initial amount of $709,368 (GBP 547,000), part
of which was converted as follows:
Amount converted
-------------------- ------------------- ----------
Shares
Date of conversion GBP USD Issued
-------------------- --------- -------- ----------
18 December
Conversion 2020 250,000 330,416 1,184,834
31 December
Conversion 2020 190,000 257,888 826,087
----------
2,010,921
The Company paid the
Investor an initial
funding fee which
was converted into 25 September
shares 2020 71,000 90,000 455,130
----------
2,466,051
==========
On 31-December 2020 the Investor subscribed for the second
subscription amount of $546,426 (GBP 400,000) with a face value of
$598,337 (GBP 438,000).
In March and April 2021, the Investor subscribed for a further
$1950,,000 (GBP 1,550,000), being the 3(rd) and 4(th) closings and
half of the subsequent closing, with a total face value of
$2,138,289 (GBP 1,699,500).
Pursuant to the SSD as described above, the Investor converts
subscription amounts into shares of the Company at a discounted
price. Upon each conversion, the difference between the actual
market value of shares issued to the Investor and the amount
converted, is recorded in other components of equity, which in 2020
amounted to $347,388.
[4] Concurrent with the initial investment by the Investor, the
Company issued 880,000 shares to the Investor for the par value of
the shares, being $258. The Investor at its discretion, may choose
to pay for these 880,000 shares, calculated at the then current
Conversion Price. Upon issuance of the shares, the company
recognised an amount $196,259, representing the fair value of the
investor's obligation to payment for the shares under the caption
"proceeds due on account of shares issued" - see Note 8. As the
contractual terms of such financial asset do not create an
entitlement to cash flows on specified dates that are solely
payment of principal and interest, the financial asset was
classified to measurement at fair value through profit or loss. As
at 31 December 2020 the fair value of this asset was estimated
$301,658 calculated by using the Conversion Price at that date of
GBP 0.251. The difference between the fair value recognised upon
initial recognition and as at 31 December, 2020 was carried to
profit or loss as financing income/expense. The Investor paid for
these shares in April 2021.
[5] In June 2020, an advisor was contracted to provide
investment advisory services to the Company and received 150,000
shares as part payment for their fees. The fair value of these
shares at the time of issuance was approximately $39,300. The
advisor also received 100,000 three year warrants exercisable at
GBP 1.00, vesting at the rate of 16,667 warrants every six months.
The contract was terminated after 16,667 warrants had vested. The
fair value of such warrants was approximately $700. See also Note
15.D. below.
NOTE 16 - SHARE-BASED COMPENSATION
A. In 2013 the Company's Board of Directors approved a share
option plan for the grant of options without consideration, to
employees, consultants, service providers, officers and directors
of the Company. The options are exercisable into the Company's
ordinary shares of NIS 0.01 par value. The exercise price and
vesting period (generally four years) for each grantee of options,
is determined by the Company's Board of Directors and specified in
such grantee's option agreement. In accordance with Section 102 of
the Israel tax code, the Israeli resident grantee's options, are
held by a trustee. The options are not cashless (they need to be
paid for) and expire upon the expiration date determined by the
Board of Directors (generally ten years from the date of the
grant). The expiration date may be brought forward, upon the
termination of grantee's employment or services to the Company.
Options do not vest after the termination of employment or services
to the Company. Options are not entitled to dividends.
The following table summarises the salient details and values
regarding the options granted (all amounts are in US Dollars unless
otherwise indicated):
Option grant dates
19 Nov 19 Nov 28 Jul 25 Jul
2020 2020 2020 6 Jul 2020 2019
Number of options
granted * 470,000 200,000 104,000 240,000 180,000
Exercise price in
$ 0.265 0.271 0.158 0.256 1.249
Recipients of the employees employees employees employees employees
options
Approximate fair value
at grant date (in
$):
Total benefit 57,773 24,194 16,047 27,084 36,246
Per option benefit 0.12 0.12 0.15 0.11 0.20
Assumptions used in
computing value:
Risk-free interest
rate 0.88% 0.88% 0.59% 0.69% 2.05%
Dividend yield 0.00% 0.00% 0.00% 0.00% 0.00%
Expected volatility 35% 35% 35% 35% 40%
Expected term (in
years) 10 10 10 10 10
Expensed amount recorded
for year ended:
31 December 2019 - - - - 15,622
31 December 2020 3,274 13,373 6,770 11,832 2,360
As some of these employees left the employ of the company prior
to 31 December 2020, their options were cancelled. The remaining
value of these options at 31 December 2020 which have yet to be
recorded as expenses, amount to $71,783.
* 100,000 options were granted to the CFO who is also a director
in the Company.
Share based compensation was treated in these financial
statements as follows:
US dollars
------------------------
Year ended 31 December
------------------------
2020 2019
------------ ----------
Total expensed amount recorded 18,209 69,654
Total capitalised amount recorded (97,844) 62,388
Total (79,635) 132,042
============ ==========
A. The following tables present a summary of the status of the
employee option grants by the Company as of 31 December, 2020 and
2019:
Weighted
average
exercise
Number price (US$)
-------------- -----------
Year ended 31 December 2020
Balance outstanding at beginning of year 3,095,920 0.43
Granted 1,014,000 0.22
Exercised (338,000) 0.10
Forfeited (631,000) 1.25
Balance outstanding at end of the year 3,140,920 0.18
============== ===========
Balance exercisable at the end of the
year 2,203,170
==============
Weighted
average
exercise
Number price (US$)
---------- -----------
Year ended 31 December 2019
Balance outstanding at beginning of year 3,145,920 0.42
Granted 180,000 1.25
Exercised - -
Forfeited (230,000) 1.01
Balance outstanding at end of the year 3,095,920 0.43
========== ===========
Balance exercisable at the end of the
year 2,521,420
==========
B. The following table summarises information about employee
options outstanding at 31 December 2020:
Weighted Weighted
Outstanding average Weighted Exercisable average
at 31 remaining average at 31 remaining
Exercise December contractual exercise December contractual
price 2020 life (years) price (US$) 2020 life (years)
-------- -------------- ------------ ----------- ---------------------- ------------
$0.10 1,828,920 2.5 0.10 1,828,920 2.5
$0.20 129,000 6.2 0.20 101,750 6.2
GBP0.12 93,000 7.5 0.16 - 7.5
GBP0.20 470,000 7.8 0.26 - 7.8
GBP0.21 210,000 9.5 0.26 35,000 9.5
GBP0.21 200,000 9.9 0.27 100,000 9.9
GBP1.05 40,000 6.2 1.28 30,000 6.2
GBP1.43 30,000 0.1 1.84 22,500 0.1
GBP1.40 30,000 6.7 1.83 22,500 6.7
GBP1.00 60,000 7.5 1.32 30,000 7.5
GBP1.00 50,000 8.6 1.25 32,500 8.6
3,140,920 2,203,170
============== ======================
The following table summarises information about employee
options outstanding at 31 December 2019:
Weighted Weighted
Outstanding average Weighted Exercisable average
at 31 remaining average at 31 remaining
Exercise December contractual exercise December contractual
price 2019 life (years) price (US$) 2019 life (years)
-------- ----------- ------------ ----------- ----------- ------------
$0.10 2,166,920 3.8 0.10 2,166,920 3.8
$0.20 129,000 7.2 0.20 69,500 7.2
GBP1.05 40,000 7.2 1.28 20,000 7.2
GBP1.05 210,000 7.5 1.36 105,000 7.5
GBP1.43 30,000 7.5 1.84 15,000 7.5
GBP1.40 30,000 7.7 1.83 15,000 7.7
GBP1.00 340,000 8.6 1.32 85,000 8.6
GBP1.00 150,000 9.6 1.25 45,000 9.6
3,095,920 2,521,420
=========== ===========
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 that were
allocated to capitalised research and development costs (up to and
including 30 June 2019).
C. Options issued to the IPO broker
Upon the IPO consummation 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 3.U., costs incurred in raising equity finance were applied
as a reduction from those equity sale proceeds and is recorded in
Other Components of Equity. As of December 31, 2020, such warrants
had not been exercised.
D. Shares and equity instruments issued in lieu of payment for services provided
a. In June 2020, an investment advisory firm was contracted to
provide services to the Company and was issued 150,000 shares and
100,000 warrants vesting in 6 month increments over 3 years. This
contract was terminated prior to its first anniversary. 16,667
warrants had vested prior the contract being terminated, with the
balance of the warrants being cancelled. The fair value of the
shares and warrants issued was approximately $40,000. The amount
relating to the shares issued was allocated to share capital and
share premium, while the warrant's fair value was allocated to
share capital - see Note 15.F.[5].
b. Upon the successful equity raise concluded in July 2020, as
described in Note 15.F.[2], the broker responsible for this
transaction received 252,750 one-year warrants exercisable at GBP
0.12 per warrant. The fair-value of these warrants at the time of
issuance was approximately $13,000. As at 31 December 2020, all
these warrants have been exercised.
c. In September 2020 the Company entered into a share
subscription agreement as described in Note 15.F.[3]. The Company
was obliged to pay the Investor a funding fee equivalent to
$90,000, paid by issuing the Investor with 455,130 shares
calculated at the contract Conversion Price. The fair value of
these shares issued was approximately $99,500 which was initially
recorded as prepaid financing costs, which are to be amortised over
the expected period of this agreement. As at 31 December 2020
approx. $23,000 had been amortised to finance expenses with the
balance of approx. $67,000 reflected as prepaid finance costs.
d. In December 2020, the company agreed to settle amounts due to
two directors in lieu of their directors fees amounting to $82,276
through the assurance of 305,000 ordinary shares of the company.
The company issued the shares in January 2021- See Notes 28.C and
D.
NOTE 17 - REVENUE
US dollars
---------------------------
Year ended 31 December
---------------------------
2020 2019
---------------- ---------
Sales 1,187,294 972,196
Royalties 666,438 371,648
Total revenue 1,853,732 1,343,844
================ =========
NOTE 18 - RESEARCH AND DEVELOPMENT EXPENSES
US dollars
-----------------------------
Year ended 31 December
-----------------------------
2020 2019
------------------ ---------
Employee remuneration, related costs and
subcontractors (*) 2,977,774 2,049,839
Maintenance of software and computers 90,597 51,472
Insurance and other expenses 11,475 19,833
Amortisation 952,606 734,752
Grant procurement expenses 5,452 -
------------------ ---------
Total research and development expenses 4,037,904 2,855,896
================== =========
(*) Including share based compensation of: 6,783 40,858
================== =========
NOTE 19 - GENERAL AND ADMINISTRATIVE EXPENSES
US dollars
-----------------------------
Year ended 31 December
-----------------------------
2020 2019
------------------ ---------
Employee remuneration and related costs (*) 406,022 478,908
Professional fees 538,159 388,290
Rentals and maintenance 256,156 266 ,808
Depreciation 311,873 274,726
Travel expenses 3,869 17,644
Impairment losses of financial assets 75,000 -
Total general and administrative expenses 1,591,079 1,426,376
================== =========
(*) Including share based compensation of: 11,168 17,861
================== =========
NOTE 20 - MARKETING EXPENSES
US dollars
-----------------------------
Year ended 31 December
-----------------------------
2020 2019
------------------ ---------
Employee remuneration and related costs (*) 624,451 643 ,526
Marketing expenses 449,609 758,580
Travel expenses 8,500 32,564
------------------ ---------
Total marketing expenses 1,082,560 1,434,670
================== =========
(*) Including share based compensation of: 258 10,935
================== =========
NOTE 21 - OTHER INCOME
As described in Note 3.J, when a government grant is related to
an expense item, it is recognised as other income.
NOTE 22 - FINANCING COSTS
US dollars
------------------------------
Year ended 31 December
------------------------------
2020 2019
---------------------- ------
Bank fees and interest 23,253 16,144
Lease liability financial expenses 15,634 17,584
Revaluation of liability related to share
subscription agreement measured at FVTPL 571,423 -
Revaluation of warrant derivative liability 852,430
Exchange rate differences - 59,856
Total financing costs 1,462,740 93,584
====================== ======
NOTE 23 - FINANCING INCOME
US dollars
------------------------
Year ended 31 December
------------------------
2020 2019
---------------- ------
Revaluation of proceeds due on account of
shares (financial asset measured at FVTPL) 105,399 -
Interest received 63,059 88,325
Exchange rate differences 129,558 -
---------------- ------
Total financing income 298,016 88,325
================ ======
NOTE 24 - TAX EXPENSE
A. The Company is assessed for income tax in Israel - its
country of incorporation. The Israeli corporate tax rates for the
relevant years are:
%
2019 23.0
2020 23.0
B. As of 31 December 2020, the Company has carry-forward losses
for Israeli income tax purposes of approximately $20 million.
According to the revised management's estimation of the Company's
future taxable profits, it is no longer probable in the foreseeable
future, that future taxable profits would utilise all the tax
losses.
C. Deferred taxes
US dollars
------------------------------------------
Year ended 31 December
------------------------------------------
Utilisation
Origination of
and reversal previously Total
recognised tax
of temporary loss Deferred tax
differences carry-forwards expense
------------ -------------- ------------
Balance at 1 January
2019 186,772 613,228 800,000
Deductions (*) - (613,228) (613,228)
------------ -------------- ------------
Balance at 31 December
2019 186,772 - 186,772
Deductions - - -
Balance at 31 December
2020 186,772 - 186,772
============ ============== ============
(*) For the year ended 31 December 2019, the Company reduced the
carrying amount of the deferred tax assets, for carry-forward tax
losses, to the extent that it is no longer probable that sufficient
taxable profit will be available to allow the benefit of all of
that deferred tax asset to be utilised.
D. Theoretical tax reconciliation
For the years ended 31 December 2020 and 2019, the following
table reconciles the expected tax expense (benefit) per the
statutory income tax rate to the reported tax expense in profit or
loss as follows:
US dollars
-----------------------------------
Year ended 31 December
-----------------------------------
2020 2019
---------------------- -----------
Loss before tax 6,253,653 4,548,032
Tax expense (benefit) at statutory rate 23% 23%
---------------------- -----------
Expected tax expense (benefit) at statutory
rate (1,438,340) (1,046,047)
Increase in taxes from permanent differences
in share-based compensation (18,316) 16,020
Increase in loss carryforwards - not affecting
the deferred tax asset 1,456,656 1,030,027
Deferred tax expense - reversal of temporary
differences - 613,228
Income tax expense - 613,228
====================== ===========
NOTE 25 - BASIC AND DILUTED LOSS PER ORDINARY SHARE
A. The earnings and the weighted average number of shares used
in computing basic loss per ordinary share, are as follows:
US dollars
-----------------------------
Year ended 31 December
-----------------------------
2020 2019
--------------- ------------
Loss for the year attributable to ordinary
shareholders (6,253,653) (5,161,260)
=============== ============
Number of shares
--------------------------
Year ended 31 December
--------------------------
2020 2019
-------------- ----------
Weighted average number of ordinary shares
used in the computation of basic loss
per ordinary share 36,590,988 32,556,686
============== ==========
B. The earnings and the weighted average number of shares used
in computing diluted loss per ordinary share, are as follows:
US dollars
-----------------------------
Year ended 31 December
-----------------------------
2020 2019
--------------- ------------
Loss for the year attributable to ordinary
shareholders (6,253,653) (5,161,260)
=============== ============
Number of shares
---------------------------
Year ended 31 December
---------------------------
2020 2019
--------------- ----------
Weighted average number of ordinary shares 36,590,988 32,556,686
Weighted average number of free shares
from share options 1,406,320 1,900,421
Weighted average number of ordinary shares
used in the computation of diluted loss
per ordinary share 37,997,308 34,457,107
=============== ==========
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 2020
----------------------------------------------------
NIS GBP Euro US $ Total
----------- --------- ----- -------- ---------
Assets
Cash and cash equivalents 372,750 1,651,352 4,223 152,401 2,180,726
Trade receivables - - - 778,061 778,061
Other current assets 258,323 368,367 - - 626,690
631,073 2,019,719 4,223 930,462 3,585,477
Liabilities
Short term borrowings 411,726 - - - 411,726
Trade payables 130,330 101,628 - 58,217 290,175
Liability related to
share subscription agreement - 841 ,944 - - 841 ,944
Warrants liability - 286,253 - - 286,253
1,014
Other liabilities ,777 - - 261,072 1,275,849
Non-current lease liabilities 146,130 - - - 146,130
1,702,963 1,229,825 - 319,289 3,252,077
(1,071,890) 789 ,894 4,223 611 ,173 333 ,400
=========== ========= ===== ======== =========
US dollars
--------------------------------------------------
31 December 2019
--------------------------------------------------
NIS GBP Euro US $ Total
----------- ------ ----- --------- ---------
Assets
Cash and cash equivalents 1,034,789 36,780 3,862 41,491 1,116,922
Other short-term financial
assets - - - 2,553,823 2,553,823
Trade receivables - - - 427,162 427,162
Other current assets 362,791 - - - 362,791
1,397,580 36,780 3,862 3,022,476 4,460,698
Liabilities
Short term borrowings 1,012,731 - - - 1,012,731
Trade payables 223,817 32,638 - 68,785 325,240
Other liabilities 1,055,690 - - 70,317 1,126,007
Non-current lease liabilities 306,783 306,783
2,599,021 32,638 - 139,102 2,770,761
(1,201,441) 4,142 3,862 2,883,374 1,689,937
=========== ====== ===== ========= =========
-- 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% 2020 5% 10%
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents (202,833) (101,416) 2,028,325 101,416 202,833
Other current assets (62,669) (31,335) 626,690 31,335 62,669
Short term borrowings 41,173 20,586 (411,726) (20,586) (41,173)
Trade payables 23,196 11,598 (231,958) (11,598) (23,196)
Liability related
to share subscription
agreement 84,194 42,097 (841,944) (42,097) (84,194)
Warrants liability 28,625 14,313 (286,253) (14,313) (28,625)
Other liabilities 101,478 50,739 (1,014,777) (50,739) (101,478)
Non-current lease
liabilities 14,613 7,307 (146,130) (7,307) (14,613)
Total 27,777 13,889 (277,773) (13,889) (27,777)
=========== =========== =========== =========== ===========
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% 2019 5% 10%
------------ ---------- ------------ ----------- -----------
Cash and cash equivalents (107,543) (53,772) 1,075,431 53,772 107,543
Other current assets (36,279) (18,140) 362,791 18,140 36,279
Short Term Borrowings 101,273 50,637 (1,012,731) (50,637) (101,273)
Trade payables 25,646 12,823 (256,455) (12,823) (25,646)
Other liabilities 105,569 52,785 (1,055,690) (52,785) (105,569)
Non-current lease
liability 30,678 15,339 (306,783) (15,339) (30,678)
Total 119,344 59,672 (1,193,437) (59,672) (119,344)
============ ========== ============ =========== ===========
-- Credit risk
All of the cash and cash equivalents and other short-term
financial assets as of 31 December, 2020 and 2019 were deposited
with one of the major banks in Israel.
Trade receivables as of 31 December, 2020 and 2019 were from
customers in Israel, the U.S., Asia and countries of the European
Union, which included the major customers as detailed in Note 27.
The Company performs ongoing reviews of the credit worthiness of
customers, the amount of credit granted to customers and the
possibility of loss therefrom. The Company includes an adequate
allowance for impairment losses (expected credit loss). As at 31
December 2020, more than 90% of net trade receivables were less
than 90 days old.
-- Trade receivables
IFRS 9 provides a simplified model of recognising lifetime
expected credit losses for all trade receivables as these items do
not have a significant financing component.
In measuring the expected credit losses, the trade receivables
have been assessed by management on a collective basis as well as
on a case by case basis. Trade receivables are written off when
there is no reasonable expectation of recovery. Management have
indicated a concern regarding the receivable from one customer, for
which a provision has been made. As at 31 December 2020, the
provision for expected credit losses was $150,000 (2019: $75,000) -
see Note 7 for more details.
Liquidity risk
The Company financed its activities from its operations, issuing
shares and warrants, Shareholders' loans and short and long-term
borrowings from the bank. For further details on the Company's
liquidity, refer to Note 2. All the non-current liabilities at 31
December 2020 and 2019 were lease liabilities which are serviced
monthly. The short-term borrowings at 31 December 2020 and 2019 and
the trade payables and other current liabilities are expected to be
paid within 1 year.
B. Fair value of financial instruments
General
The financial instruments of the Company include mainly trade
receivables and debit balances, credit from banking institutions
and others, trade payables and credit balances, IIA liability, and
balances from transactions with shareholders.
The principal methods and assumptions used in calculating the
estimated fair value of the financial instruments are as follows
(fair value for disclosure purposes):
Financial instruments included in current asset items
Certain instruments (cash and cash equivalents, other short-term
financial assets, trade receivables and debit balances) are of a
current nature and, therefore, the balances as of 31 December, 2020
and 2019, approximate their fair value.
Financial instruments included in current liability items
Certain instruments (credit from banking institutions and
others, trade payables and credit balances, suppliers and service
providers and balances with shareholders) - in view of the current
nature of such instruments, the balances as at 31 December, 2020
and 2019 approximate their fair value. Other instruments are
measured at fair value through profit or loss.
Financial instruments' fair value movements
The reconciliation of the carrying amounts of financial
instruments classified within Level 3 (based on unobservable
inputs) is as follows:
US dollars US dollars
--------------- -------------------------------
Financial Financial liabilities
asset
--------------- -------------------------------
Proceeds Liability
due on account related to
of shares share subscription Warrants
issued agreement liability
--------------- ------------------- ----------
Balance at 1 January 2019 - - -
Fair value at 31 December
2019 - - -
Recognition in asset (liability) 196,259 (1,164,190) (82,251)
Revaluation Adjustment 105,399 (578,783) (267,976)
Exchange rate differences - (25,105) -
Issuance of shares - 926,134 -
Warrants exercised - - 63,974
Fair Value at 31 December
2020 301,658 (841,944) (286,253)
=============== =================== ==========
Both the financial assets and the two types of financial
liabilities are measured at fair value through profit and loss.
Measurement of fair value of financial instruments
The following valuation techniques are used for instruments
categorised in Level 3:
Proceeds due on account of shares issued
This asset of 880,000 shares was valued at the Conversion Price
as at 31 December 2020 as described in detail in Note 15.F.[4]. As
the Conversion Price is calculated by choosing the share price of
the lowest 5 days out of the previous 20 trading days, any one day
change in the share price of the Company will not have a
significant effect on the Conversion Price, if at all.
Liability related to share subscription agreement
This liability is valued as the combination of two parts as
described in detail in Note 15.F.[3].
a. The portion that the Company has the right (70% of the
amount) to repay to the Investor, is valued at such face value and
this liability will not change as long as it has not been converted
into shares by the Investor.
b. The remaining 30% of the face value is valued at the fair
market value of the shares that the Investor may receive by
converting the unconverted subscription amount into shares at the
Conversion Price. The two variables in this valuation at any moment
in time, are the Conversion Price and the Share Price, with the
larger the difference between them, the larger this liability will
be. As the Conversion Price is calculated by choosing the share
price of the lowest 5 days out of the previous 20 trading days, any
one day change in the share price of the Company will not have a
significant effect on the Conversion Price, if at all, however any
change in the Company's share price will change the value of this
liability. The quicker that the share price distances itself from
the prevailing Conversion Price, the greater this liability will
increase. The longer that the share price takes in moving away from
the Conversion Price, the closer this liability will be attracted
to its face value.
As only 30% of this liability is sensitive to changes in the
Company's share price and such sensitivity is limited to continuous
large moves in the Company's share price, any such changes in the
share price, have a limited effect on the overall amount of this
liability.
Warrants liability
This liability was valued at the intrinsic value of the GBP 0.30
warrants as described in detail in Note 15.F.[2]. Should the
Company's share price increase, then the warrants intrinsic value
will increase by the same amount, however as the Company has a put
warrant which is triggered under certain circumstances when the
Company's share price reaches GBP 0.40, the value of the warrants
will not increase indefinitely. Should the Company's share price
decrease below GBP 0.335 then their intrinsic value will not be
used to value the warrants as such value would be lower than the
Black Scholes two step method mentioned in the note above. In such
circumstance the fair value of these warrants will decrease less
than the decrease in the share price of the Company as is inherent
in the Black Scholes valuation model.
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, 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 ('Operating
Segments'), in respect of reporting segmented activities. In terms
of IFRS 8, the management has determined that the Company has a
single area of business, being the development and delivery of
high-end network processing technology.
The Company's revenues from customers are divided into the
following geographical areas:
US dollars
---------------------------
Year ended 31 December
---------------------------
2020 2019
---------------- ---------
Asia 335,000 60,840
Israel 262,119 437,479
United States 1,256,613 845,525
---------------- ---------
1,853,732 1,343,844
================ =========
%
------------------------
Year ended 31 December
------------------------
2020 2019
----------- -----------
Asia 18.1% 4.5%
Israel 14.1% 32.6%
United States 67.8% 62.9%
----------- -----------
100.0% 100.0%
=========== ===========
Revenue from customers in the Company's domicile, Israel, as
well as its major market, the United States and Asia, 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
-------------------------
2020 2019
------------ -----------
Customer A 52% 28%
Customer B 13% 28%
Customer C 12% 21%
Customer D 7% 8%
Customer E 6% 8%
------------ -----------
89% 93%
============ ===========
NOTE 28 - RELATED PARTIES
A. Founders
In April 2017, the employment agreement of the two founders of
the Company Mr. David Levi and Mr. Baruch Shavit, was amended, in
terms of which each of them, in addition to their salary, 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. Such bonus is dependent on their continual
employment by the Company.
Each founder has an amount due to them for compensation
originating in prior years - see Note 13.
The two founders participated in the equity and warrant issue in
July 2020 as follows - see Note 15.F.[2].
Number of securities GBP amount paid
purchased in July 2020
------------------------------------------------------------------------ ----------------------------------------------------------------------
upon
for exercise upon
shares of exercise
and GBP0.20 of
GBP0.20 warrants GBP0.30
and in warrants
GBP 0.20 GBP 0.30 GBP0.30 December in May
Founder Shares warrants warrants warrants 2020 2021
David
Levi 1,333,334 666,667 666,667 160,000 133,334 200,000
Baruch
Shavit 333,334 166,667 166,667 40,000 33,333 50,000
----------------------- ---------------------- ----------------------- ---------------------- ---------------------- ----------------------
1,666,668 833,334 833,334 200,000 166,667 250,000
======================= ====================== ======================= ====================== ====================== ======================
B. Chief Financial Officer
Mr. Reichenberg, the CFO of the Company, received 109,000 ESOP
options on his appointment in March 2017, vesting over four years,
exercisable at $0.20 per option and with an expiration date in
March 2027.
In November 2020 Mr. Reichenberg received 100,000 ESOP options,
vesting over three years, exercisable at GBP 0.20 per option and
with an expiration date in November 2030, the fair value of which,
amounted to $12,292 at the date of grant.
Mr. Reichenberg was initially appointed as a director of the
Company on 29 June 2017 and was reappointed on 22 June 2020.
C. Remuneration of key management personal including directors
for the year ended 31 December 2020
US dollars
------------- -------------- -------
Salary Share based
Name Position and benefits compe-nsation Total
------------- -------------- -------
Graham Woolfman
(1)(3)(5) Non-Executive Chairman 44,469 44,510 88,979
Chief Executive Officer
David Levi (4) 206,320 - 206,320
Mark Reichenberg Chief Financial Officer
(1) (4) 145,564 8,791 154,355
VP Research & Development
Shavit Baruch (4) 206,321 - 206,321
Neil Rafferty (1)
(3) Non Executive Director 32,370 37,766 70,136
Chen Saft-Feiglin
(2) (3) Non Executive Director 15,928 - 15,928
Zohar Yinon (2)
(3) Non Executive Director 14,638 - 14,638
------------- -------------- -------
665,610 91,067 756,677
============= ============== =======
(1) Reappointed 22 June 2020.
(2) Reappointed with effect from 15 November 2020.
(3) Independent director.
(4) Key management personnel as well as director. Long-term
employee benefits and termination benefits account for less than
12.5% of their salary and benefits.
(5) Resigned 17 November 2020.
Remuneration of key management personal including directors for
the year ended 31 December 2019
US dollars
------------- -------------- -------
Salary Share based
Name Position and benefits compe-nsation Total
------------- -------------- -------
Graham Woolfman Non-Executive Chairman 47,905 - 47,905
David Levi Chief Executive Officer 213,994 - 213,994
Mark Reichenberg Chief Financial Officer 141,735 17,125 158,860
Shavit Baruch VP Research & Development 214,030 - 214,030
Neil Rafferty Non Executive Director 38,324 - 38,324
Chen Saft-Feiglin Non Executive Director 14,981 - 14,981
Zohar Yinon Non Executive Director 14,532 - 14,532
------------- -------------- -------
685,501 17,125 702,626
============= ============== =======
D. Directors' equity interests in the Company as at 31 December 2020
Shares Options and warrants
--------------------------------------- -------------------------------------------------------
Name Unexer-cised Unexer-cised Total
Direct Beneficial Total shares vested Unvested GBP 0.30 options
holdings holdings held options options warrants and warrants
----------- ----------- ------------- ------------- --------- ------------- --------------
Graham Woolfman
* 10,715 10,715 - - - -
David Levi 8,767,900 - 8,767,900 60,710 - 666,667 727,377
Shavit Baruch 5,000,000 - 5,000,000 60,710 - 166,667 227,377
Mark Reichenberg
*** - - - 81,750 127,250 - 209,000
Neil Rafferty
** 7,143 - 7,143 - - - -
Chen Saft-Feiglin - - - - - - -
Zohar Yinon - - - - - - -
13,775,043 10,715 13,785,758 203,170 127,250 833,334 1,163,754
----------- ----------- ------------- ------------- --------- ------------- --------------
* 165,000 shares awarded 29 December 2020, issued 6 January 2021,
with a fair value of $ 44,510.
** 140,000 shares awarded 29 December 2020, issued 6 January
2021, with a fair value of $ 37,766.
*** 100,000 options granted 19 November 2020 with a fair value
of $12,292.
Directors' equity interests in the Company as at 31 December
2019
Shares Options
------------------------------------- ----------------------------------
Name Total Unexercised
Direct Beneficial shares vested Unvested Total
holdings holdings held options options 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 - - - 54,500 54,500 109,000
Neil Rafferty 7,143 - 7,143 - - -
Chen Saft-Feiglin - - - - - -
Zohar Yinon - - - - - -
11,275,043 10,715 11,285,758 175,920 54,500 230,420
----------- ----------- ----------- ------------ --------- ---------
NOTE 29 - Reconciliation of liabilities arising from financing activities
Lease Liabilities Short Term Total
Borrowings
------------------ ------------ ------------
1 January 2020 458,431 1,012,731 1,471,162
Cashflow
* Repayments (151,648) (1,237,998) (1,389,646)
* Proceeds - 636,993 636,993
------------------ ------------ ------------
31 December 2020 (*() 306,783 411,726 718,509
------------------ ------------ ------------
( *() Including current maturities of $160,653
For financial liabilities to be settled through issuance of
ordinary shares see notes 15.F and 26B.
Lease Liabilities Short Term Total
Borrowings
------------------ ------------ -----------
1 January 2019 - 133,497 133,497
IFRS 16 adoption as of 1 January
2019 (see Notes 3.W and 11) (*() 441,068 - 441,068
New leases during the year 129,742 - 129,742
Cashflow
* Repayments (112,379) (133,497) (245,876)
* Proceeds - 1,012,731 1,012,731
------------------ ------------ -----------
31 December 2019 (**() 458,431 1,012,731 1,471,162
------------------ ------------ -----------
( *() Including current maturities of $102,731
( **() Including current maturities of $151,649
NOTE 30 - Subsequent events
1. In terms of the Extraordinary General Meeting held on 29
December 2020, 165,000 shares were awarded to Graham Woolfman, the
then non-executive Chairman and 140,000 shares were awarded to Neil
Rafferty a non-executive director. The allotment and issue of these
shares was completed on or around 6 January 2021.
2. In January 2021 an employee exercised 220,000 employee
options at an exercise price of $ 0.10. The Company received
$22,000 proceeds from this option exercise. In February 2021 an
employee exercised 6,667 employee options at an exercise price of
GBP 0.12. The Company received approximately $1,100 (GBP800)
proceeds from this option exercise.
3. On 10 March 2021 Mr. Joseph ("Yosi") Albagli was appointment
as non-executive Chairman of the Board, in place of Mr. Graham
Woolfman, who resigned as a board member in November 2020.
4. In March and April 2021 the Company received GBP1,550,000
($1,950,000) funds pursuant to a share subscription agreement - see
Note 15.F.[3]. In April 2021, the Investor converted GBP1,100,000
($1,523,500) of subscription amounts, into 3,838,952 shares.
5. In May 2021 the accelerator clause for the GBP 0.30 warrants
was activated by the Company and 3,500,000 of these warrants were
exercised, for which the Company issued the same number of shares,
while 166,667 warrants not exercised, were cancelled in terms of
the Warrant Instrument - see Note 15.F.[2]. The total amount
received by the Company upon the exercise of the GBP 0.30 warrants
was approximately $ 1,450,000.
In May 2021, the Directors exercised all their GBP 0.30 warrants
held. David Levi, CEO exercised 666,667 warrants and Shavit Baruch,
Executive Director exercised 166,667 warrants. In addition, on 30
April 2021 each of David Levi and Shavit Baruch disposed of certain
Ordinary Shares in order to fund costs associated with the exercise
of these warrants. David Levi sold 310,000 shares at GBP 0.535 per
share and Shavit Baruch sold 75,000 shares at GBP 0.526 per
share.
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END
FR KZLBLFQLLBBX
(END) Dow Jones Newswires
June 24, 2021 05:49 ET (09:49 GMT)
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