Annual Report and Financial Statements
For the Year Ended 31 December 2018
Ethernity Networks Ltd
Company registration number: 51-347834-7.
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Ethernity Networks, headquartered
in Israel, provides innovative
networking and security solutions
on programmable hardware for
accelerating telco/cloud networks.
Ported onto any FPGA, Ethernity’s
software offers complete data
plane processing with a rich set of
networking features, robust security,
and a wide range of virtual functions
to optimise the network. The
Company’s ACE-NIC smart network
adapters, ENET SoCs, and turnkey
network appliances offer best-in-
class all-programmable platforms for
the telecom, cloud service provider,
and enterprise markets offering its
customers complete solutions that
quickly adapt to their changing
needs, improving time-to-market and
facilitating the deployment of edge
computing, 5G, IoT, and NFV.
The Company’s core technology,
which is populated on programmable
logic, enables delivering data offload
functionality at the pace of software
development, improves performance
and reduces power consumption
and latency, therefore facilitating
the deployment of virtualization of
networking functionality.
Contents
• Statutory and Other Information
• Chairman’s Statement
• Chief Executive’s Statement
• Strategic and Financial Review
• Board of Directors
• Corporate Governance Statement
• Directors’ Report
• Statement of Directors’ Responsibilities
•
Independent Auditor’s Report to the Shareholders
of Ethernity Networks Limited
• Statement of Financial Position
• Statement of Comprehensive Income
• Statement of Changes in Equity
• Statement of Cash Flows
• Notes to the Financial Statements
Annual Report and Financial Statements for the year ended 31 December 2018 02
Statutory and Other Information
Directors
Secretary
Registered office
Auditor
Registrars
Graham Woolfman
David Levi
Mark Reichenberg
Shavit Baruch
Neil Rafferty
Chen Saft-Feiglin
Zohar Yinon
Mark Reichenberg
Independent Non-Executive Chairman
Chief Executive Officer
Chief Financial Officer
VP Research & Development
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
13A Hamelacha Street
Lod Industrial Park 7152025
Israel
Fahn Kanne & Co. Grant Thornton Israel
32 Hamasger Street
Tel Aviv
6721118
Israel
Link Market Services (Guernsey) Limited
Mont Crevelt House, Bulwer Avenue
St. Sampson, Guernsey
GY2 4LH
Nominated Adviser and Broker
UK Solicitors
Israel Solicitors
Arden Partners plc
125 Old Broad Street
London
EC2N 1AR
Howard Kennedy LLP
No.1 London Bridge
London
SE1 9BG
Gornitzky & Co
45 Rothschild Blvd.
Tel Aviv 6578403
Israel
Public Relations
In house
Ethernity Networks
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
03
Chairman’s Statement
During 2018 Ethernity continued to
develop its patented products and
technology solutions across a range of
applications and related markets in the
network and cloud data management
arenas.
Specific product and design solutions
were delivered during the year resulting
in first technology licensing agreements
with two Tier1 OEM customers, that
will generate recurrent revenue streams
due to commence in 2019 and then in
following years.
Following on from the previous year,
legacy royalty and FPGA income
remained low as anticipated during
the year due to historic customers not
producing revenue from this generation
of products. However, going forward
licensing income is anticipated to
recover in 2019 and this is set out in
further detail in the Chief Executive`s
Review below.
During the year the management’s
focus continued on developing the
Sales and Marketing and Research
and Development team’s strength
and infrastructure, as the Company
deployed resources to support existing
customers and to target new business
opportunities.
The Company traded in line with
expectations for the year with revenue
delivery in 2018 being relatively low
due to market delays and customer
positioning. This is outlined further in
the Strategic and Financial Review set
out below.
Revenues for 2018 were $1.12m
(2017 $1.52m) with gross margin of
$0.813m (2017 $1.3m) and operating
loss of $2.7m (2017 $0.152m profit)
respectively. The Company continued
a managed investment programme,
investing approximately $4m
(2017 $1.95m) in R&D and related
expenditure.
At the year end the Company`s cash
balance available for working capital
and investment for growth was $8.5m
(2017 $14.9m). The Company maintains
close management of the use of cash
resources and the rate of deployment of
cash is monitored by management and
the Board with a view to adjusting cash
utilisation and maintaining cash reserves
to meet trading requirements.
Since the year end, Ethernity has
continued with its investment
programme which is focussed on
customer led product and service
development directly related to
customer relationships. Sales and market
opportunities are developed based on a
continued presence and profile within
the network and data management
sectors, where the Company`s IP and
technology innovation maintains a
considerable profile.
The Board remains conscious of the
uncertainties over the timing of the
securing of customer orders and
receipt of revenues from product
sales and licensing transactions. This
remains a challenge for the executive
management in predicting when
substantive revenues and related profits
will be earned, including for the current
financial year. However, the Board is
confident that the Company`s solutions
continue to be well received and will
translate to significant revenues in the
years ahead.
The Board is very appreciative of the
considerable efforts of our management
and staff, who all work tirelessly
towards the development, sales and
administrative goals of the Company.
I thank them for their continuing hard
work and commitment to the Company.
Outlook
It is apparent that 2019 will be another
year of challenges to steadily develop
customer partnerships and relationships
and grow the revenue delivery from a
relatively low base. However, the Board
is confident that progress will be made
during the year and of building value
over the longer term for shareholders.
Graham Woolfman
Chairman
11 June 2019
Annual Report and Financial Statements for the year ended 31 December 2018
04
Chief Executive’s Statement
Business and Market Overview
Ethernity Networks operates in a market
which is evolving and undergoing
significant change. This includes
the growing use of FPGA devices
for networking appliances and the
transition to 5G networks which will
provide higher data throughput to users
and Network Function Virtualization
(NFV).
The Company presents its technology
and appliances to OEMs and other
partners responsible for integration,
delivery and support of overall solutions
with embedded Ethernity technology,
in FPGA Smart NIC or appliances. The
Company has continued to build its R&D
and Sales and Marketing infrastructure
to enable the Company to move from a
technology / IP company to a solutions
and complete product provider.
Central to all of Ethernity`s delivery is
patented architecture which produces
the fundamental ENET code, which
has been deployed in 600,000 OEM
platforms in broadband, Ethernet Access
and mobile markets. This ENET code is
embedded into the various solutions, be
they licensed products, the FPGA Smart
NIC or as part of appliances.
We expect continued progress in the
market acceptance of the use of FPGA
for networking and security applications
in preference to ASIC’s. This is
evidenced by the initiatives undertaken
on the OCP (Open Compute Project)
and AT&T. Furthermore, many ASIC
Network processors’ offerings have
been discontinued1, providing many
more opportunities for FPGA-based
all programmable and cost effective
platforms. We are confident that our
technology will be a successor to ASIC
based NPUs for networking and security
appliances.
With our main goal to deliver complete
product solutions that will result in
generating a targeted 10 times more
revenue from each use of our ENET
Code technology, we developed the
ACENIC FPGA SmartNIC family to target
acceleration of Networking Function
Virtualization at the telco edge, which
is still an evolving market, along with
an additional networking appliance for
existing markets - including FTTH and
Ethernet Access as described below
These two markets are:
• The FTTH (fibre to the home)
Broadband deployment with
XGSPON, DPU/ONU. We are
currently discussing a 10G Passive
Optical Network (XGSPON) solution
on a central office site. According
to Dell’Oro Group, PON has a Total
Addressable Market of $7 billion by
2022 and a CAGR of almost 40%.
• The EAD (Ethernet Active Devices)
market is a further opportunity
for the Company currently under
discussion, the product offering
being a UEP (Universal Edge
Platform) as published on the
Company website and in the market
place on 29 May 2019.2 Currently
we are in discussions for the mass
rollout of the UEP with a major US
OEM. The existing marketplace for
this offering is forecast to reach
$1.47 billion in 2021, achieving
a 2017–2022 compound annual
growth rate (CAGR) of 8 percent.
We have addressed the existing
appliance market under Current Trading
below .
Review of 2018 achievements
I am pleased to report that during the
2nd half of 2018 we succeeded in
winning existing Flow Processor FPGA
Firmware and Software business with a
Tier1 U.S OEM, and signed a contract
with a military-avionic Tier1 OEM for
a high capacity switch, all integrated
on Xilinx’s FPGAs Commercial Off
The Shelf (COTS) devices, with the
majority of the revenue from the two
licensing deals being recognised during
2019. Furthermore we delivered the
Company’s ACENIC-100 FPGA Smart
NIC, supporting complete router
functionality, to a Korean OEM for a
Multi access Edge Computing (MEC)
platform to be hosted on low cost,
low power HPE servers designed to
meet the edge compute constraints.
The most important licensing revenues
come from ongoing recurrent royalties
and FPGA that the Company will
continue to generate from contracts
and wins signed more than 10 years
ago. However the recurrent revenues
were badly affected during 2017 and
2018 due to difficulties experienced
by three long-standing customers
in generating sales from products
developed years ago. Whilst in 2019 the
revenue from two of the three vendors
has recovered and is growing, one of
them has ceased operations. In light
1 as highlighted in Ethernity’s Blog https://www.ethernitynet.com/blog/the-risk-of-using-programmable-npus/
2
as published on the website https://www.ethernitynet.com/news/ethernity-networks-releases-modular-programmable-universal-edge-
platform/
Ethernity Networks
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
05
of this the licensing deals signed with
the Tier1 OEMs represents part of the
change we anticipate developing into
stable recurrent revenue from royalties.
Going forward the company intends
to focus on Tier1/Tier2 OEMs rather
than the small Tier3/4 vendors we dealt
with in the past, with the goal being
to build stable recurrent revenues from
technology licensing.
In conjunction with our long term plan
and active projects with major OEMs
relating to acceleration of virtualized
networking applications for obtaining
major market share from FPGA smart
NICs for telco cloud business, in which
the market is still evolving, our plan is to
generate greater value from our existing
technology and solutions, by offering
complete all programmable networking
and security platforms that we target
will generate 10 times more revenue for
each use of our firmware and software
technology. This has been enabled by
the following:
• We developed and obtained
application software that can run
on top of Ethernity’s Flow Processor
FPGA Firmware;
• We have developed a hardware
platform to serve as a Universal
Edge Platform (UEP) that will host
our field proven flow processor for
general edge access deployment
with a complete programmable
platform; and
• We developed XGSPON technology
to serve deployment of fiber to the
distribution point (FTdP) , cellular site
aggregation and FTTH (Fiber to The
Home).
These developments will fuel major
revenue streams by delivering complete
solutions while the telco cloud business
is evolving.
Our ACENIC-100 FPGA SmartNIC offers
unique capabilities for telco/cloud
edge market by integrating complete
router functionality on a NIC to serve
as a gateway for multiple virtualized
networking appliances such as Security,
VPN, Broadband gateway and Internet
of things (IoT) aggregation platforms.
With the current ongoing discussions
and engagements with new potential
Tier1 customers, we are extremely
positive as to the progress the Company
is making to become the leader in
delivering networking and security
acceleration for various edge virtualized
appliances.
Current Trading
Revenue in the year under review was
bolstered mainly due to the two new
contracts signed in the fourth quarter
of 2018 referred to above along with
the resultant increase from the recurrent
revenue derived from previous ENET
flow processor engagement and the
licensing deal. The Company is making
positive and solid progress towards
obtaining major business for its new
Universal Edge Platform proposals. With
the Release of our FPGA Smart NIC
ACENIC-100, we anticipate a greater
impact on, and engagement in joint
development projects with Tier1 OEMs
around the ACENIC-100, that will
further fuel our growth in this area.
Furthermore, the Company anticipates
concluding agreements with two
Tier1 OEMs in the FTTH Broadband
deployment and EAD (Ethernet Access
Devices) existing markets respectively,
with rollout and production plans for
the latter portion of 2019, and mass
deployment in 2020, along with other
initiatives including in 5G networks.
This will drive the product into the
market along with our FPGA SmartNIC
solutions.
The year continued with the bedding
down of the infrastructures for R&D
and Sales and Marketing as detailed
in our IPO plans and the 2018 half
year results, with our year to date
performance continuing to track the
half year as anticipated. We believe that
both the Research and Development
and Marketing infrastructures are now
positioned as we anticipated so as to
allow the projected growth.
As anticipated, the building of these
teams had a direct effect on our
profitability for the 2018 financial year,
in support of management’s philosophy
to build the Company in 2018 so as to
achieve future growth in line with the
anticipated market growth from 2019
onwards. While we are mindful of the
risks posed by the prevailing dynamics
and current delays in the macro market,
we continue to have a high level
of confidence that we are the best
positioned company in our market, as
evidenced by the new contracts signed
and the current discussions with new
and existing customers.
Annual Report and Financial Statements for the year ended 31 December 2018 06
Chief Executive’s Statement
I am now significantly more positive of
achieving our planned growth objectives
in existing and new market places
as I see the growth in interest in the
Company’s offerings and the opening
of materially significant discussions
that will lead to the Company making
considered headway in 2019 and allow
for multiple times growth in 2020 as
the solutions pass testing phases by the
operators and reach mass deployment.
David Levi
Chief Executive Officer
11 June 2019
Outlook
The Company continues to focus
on the development and delivery
of its SmartNIC solutions for joint
development projects with Tier1
virtualization solutions, that when
completed will fuel growth from 2020
onwards. In parallel with this, the
Company continues to drive business
in existing markets including mobile,
broadband, cable and wireless,
together with vertical markets such as
the avionics and automotive markets,
with the goal of generating additional
revenues.
Revenues increased in the second half
of 2018 over the same period in 2017
due to an increase in activities around
licensing deals signed with Tier1 OEMs.
This trend has continued into the
first quarter of 2019, with revenues
materially surpassing the same period
of 2018.
In 2020 the Company anticipates
commencing the generation of cash
flow from trading operations during the
second half of the year.
Ethernity Networks
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
07
Strategic and Financial Review
Ethernity Networks is a leading
innovator of software-defined network
processing and security solutions on
programmable hardware. The company
is currently working to accelerate
commercialisation through the launch
of its SmartNIC combined with
virtualized software solutions, with the
focus on Tier1 OEMs. The Company’s
core technology, which is populated
on programmable logic, enables
delivering data offload functionality
at the pace of software development,
improves performance and reduces
power consumption and latency,
therefore facilitating the deployment
of virtualization of networking
functionality.
The Market
We live in an age of massive demand
for data. Today’s devices and associated
applications, whether Video on
Demand, online gaming, online storage
for data backup, or artificial intelligence,
require high bandwidth and low latency.
Whereas Network Interface Cards
(NICs) were once used exclusively for
providing a means of transferring data
throughout the network, today’s focus
is not only about connectivity, but also
on optimizing the network’s agility and
efficiency.
SmartNICs have therefore begun to
replace traditional NICs as a means of
addressing the primary disadvantage of
pure software-based networking, that
is, price per performance. SmartNICs
provide the same I/O functionality
between the CPU and the network,
while offloading many of the CPUs
most taxing data transfer functions as
a means of accelerating applications
and improving both productivity and
cost-efficiency. Moreover, SmartNICs
can offer similar programmability to
software, only in a hardware-based
environment.
SmartNICs are used in a wide variety
of markets, ranging from the financial
services industry, where exceedingly low
latency can be the difference of millions
of dollars within microseconds, to the
storage market, where remote access
to arrays of solid-state drives (SSDs)
requires acceleration to deliver such
storage services to the network edge
and customer premises.
Ethernity’s FPGA SmartNICs are
especially valuable in the field of
edge computing, which has various
real-world markets . Whether for the
telecom industry’s implementation of
5G services to enable the Internet of
Things (IoT) and virtual reality or for the
automotive industry’s experimentation
with autonomous cars, FPGA SmartNICs
are an absolute necessity to not only
transfer data throughout the network
quickly and efficiently, but also to
offload functions so that CPUs can
concentrate on their primary purpose –
compute. This provides the acceleration
without which such applications could
not exist, and the efficiency to make
them viable revenue-generators.
FPGAs are the natural hardware solution
for NFV as they are flexible, quick to
market, efficient, scalable, and come
with different size options to serve
different markets and solutions. FPGA
platforms are being widely deployed
in automotive, aerospace, industrial,
storage, and networking systems.
The company’s FPGA-based Smart
NIC delivers on the vision of NFV: to
establish open platforms that would
enable the use of commercial off-
the-shelf (COTS) servers instead of
proprietary hardware platforms and
delivering hardware acceleration
required to operate virtualized software
architecture on COTS FPGA platforms.
Achievements
During 2018, key operational
achievements have included the
announcement of three new contracts
relating to the developments and
objectives whereby the Company
has moved towards being a solutions
provider. These include:
• The Company signed a contract
in October 2018 to supply its
ENET Switch and Traffic Manager
firmware for a North American Tier1
telecommunications OEM. Ethernity
has completed the integration of
its firmware on the equipment
manufacturer’s existing fibre-
to-the-home optical networking
platform for advanced broadband
services with 4K video. The contract
represents nearly $0.5 million dollars
in short-term revenue for Ethernity
and, given the popularity of the
platform and the size of the OEM, is
expected to generate an estimated
$2 million in future recurrent
revenues from royalty streams over
the next 3 years, with additional
royalty streams extending thereafter.
The agreement between the two
companies specifies that Ethernity’s
solution will be integrated into
between 5,000 to 15,000 devices
annually for this specific platform,
representing about 1 million homes.
Annual Report and Financial Statements for the year ended 31 December 2018
08
Strategic and Financial Review
Furthermore, thanks to the success of
this solution, the parties have already
engaged in discussions to apply
Ethernity’s ENET firmware and software
to the customer’s broadband switch and
router platforms, which, if successfully
concluded, would add to the ongoing
royalty stream by more than three times
the present arrangement.
• The Company signed a contract
in November 2018 to supply a
Tier1 North American aviation and
defence OEM with its ENET Switch/
Router firmware and software.
Ethernity will integrate its firmware
on the customer’s FPGA-based
avionics platform. The contract
represents $400,000 in short-term
revenue with additional future
recurrent revenues from royalty
streams.
• Further to a contract with a
Financial Performance
Korean OEM signed in June 2018
that specified the final delivery
of a customised solution on
FPGA, embedding Ethernity’s rich
networking features including
hierarchical QoS, flow classification,
protocol offloading, and routing, the
Company announced on January
16, 2019 that it had successfully
completed delivery of its 100Gbps
ACE-NIC100 FPGA SmartNIC to the
Korean OEM.
• The ACE-NIC100 will be
incorporated into commercial off-
the-shelf (COTS) servers that come
with fewer CPU cores compared
to regular data centre servers,
resulting in significant power and
cost reduction. The combination
of the powerful ACE-NIC100 with
edge-optimized COTS servers deliver
a high-performance yet affordable
and energy efficient platform, ideal
for network edge virtualization.
As stated in our interim results to 30
June 2018, the adoption of the new
networking virtualization market in
which we operate was delayed by some
12 months, which trend continues, and
our trading results, as a consequence,
reflect this delay and are in line with
expectations.
The Company continues to operate
in line with its budgeted cost base
and R&D expense allocation, and
is forecasting to generate positive
cash flows from operating activities
during 2020. Whilst this continues
to be reviewed and adjusted where
appropriate, R&D activity and related
expenditure remains focused on new
product developments aligned with the
market and customer requirements.
Ethernity Networks
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
09
Key financial results
Revenues
Gross Margin
Gross Margin %
Operating (Loss) Profit
Net Financing income
(Loss) Profit before tax
Tax benefit
Net comprehensive (loss) income for the year
Basic earnings per ordinary share
Diluted earnings per ordinary share
Weighted average number of ordinary shares for basic earnings per share
Revenue Analysis
US Dollar
Audited
For the year ended
31 December
2018
2017
1,123,707
812,513
72.31%
(2,785,731)
238,542
(2,547,189)
–
(2,547,189)
(0.08)
(0.08)
32,526,149
1,518,661
1,304,222
85.88%
152,219
7,252
159,471
–
159,471
0.01
0.01
25,397,245
Revenues for the twelve months ended 31 December 2018 declined by 35% to $1.123m (2017: $1.519m). Whilst this result
may seem disappointing, given the first six months revenue of $441k which continued the downward trend across both halves
of 2017 resulting mainly from a decline of recurrent revenue from previous engagements, the second six months of 2018
represents a major change in securing lucrative technology licensing deals with Tier1’s that will generate ongoing recurrent
revenue in the years to come. Along with the first contract of our ACENIC100, in the second half of 2018, this shows a recovery
in revenues compared to the first and second six months of 2017 as well as the first six months of 2018.
Margins
Gross margins remained above the anticipated 50% level that the Company models its forecasts on with the 2018 gross margin
being 72.31% as compared to 85.8% in 2017. As always, the gross margin will vary according to the revenue mix as Royalty and
Design Win revenues achieve an approximate 100% gross margin before any sales commissions are accounted for.
During the 2018 financial year, sales commissions of $76,187 (2017 $nil) were paid and charged to cost of sales. Excluding
these, the gross profit on revenues for 2018 would have been 79.1% compared to 85.8% for 2017.
Operating Costs
Operating costs increased as planned primarily due to greater Sales & Marketing expenses, R&D expenses and the annualised
costs related to becoming a listed company as previously highlighted. The Company has, along with the continued planned
expansion during 2018 focussing on its SmartNIC, established the infrastructure to enable it to achieve the goals of 2019 and
beyond.
Annual Report and Financial Statements for the year ended 31 December 2018 10
Strategic and Financial Review
Some of the increases in costs can be attributed, amongst other things to;
• An increase in the amortization charge of the Intangible Asset of $206,660 to $322,724 (2017 $116,064)
• Foreign exchange gains relating to translation differences at the end of the year of $23,235 (2017 loss of $127,790)
• The provision for a doubtful debt of $32,320 and €21,000 for a customer that was placed under administration during
January 2019 and the outcome of which remains uncertain.
• A further provision of $75,000 against amounts charged to a Russian customer in 2017 that is awaiting payment from their
customer, a Russian government entity. Due to the major delay in payment it was felt prudent to create this provision.
•
Increases in costs relating to the expanded business and costs being fully annualised compared to 2017 as follows:
a.
b.
Listed company costs increased by $162,283
Independent director fees increased by $91,527
c. Marketing and Selling salary and consultants costs increased by $816,501
d.
Research and Development costs after providing for capitalisation of R&D and amortisation charges increased by
$257,711, with gross R&D staff employment costs before capitalisation increasing by $1,836,174
e.
Amortisation charges of the intangible asset increased by $206,660
Operating Loss and Net Comprehensive Loss for the Year
After taking the above into account, the Operating Profit for the year was in line with expectations. The operating profit in 2017
of $152,219 was a result of the inclusion of the European Union Grant received in 2017 of $203,618 as “Other Income” not
repeated in 2018 and includes in 2018 a marketing grant received via the Israeli Ministry of Economics and Industry of $104,105.
The Net loss for the year was reduced due to gross interest earned in 2018 on the cash management of funds of $210,340
(2017 $69,472).
In summary, other than the provisions for bad debts and provision against the delayed payments by a customer, gross revenues
for 2018 of $1,124m (2017 $1.519m), gross margins of $812,513 (2017 $1,304m) and the net loss of $2,547m (2017 net
income $159,471) were in line with our expectations for the year.
Balance Sheet
The balance sheet strength of the Company remains sound with substantial cash reserves in place to meet the investment
activities and operating requirements of the business.
The net cash utilised and cash reserves are carefully monitored by the Board, who are satisfied that the cash resources
remain sufficient to meet the current and future requirements. Cash utilised in operating activities for the year is $2,155,378
as anticipated (2017 $437,249) with the cash spend being directed in the main toward the Sales and Marketing and R&D
infrastructure. Cash reserves remained positive at $8,557,524 including financial instruments as of 31 December 2018, (2017
$14,950,578) and in line with forecast outcomes.
Short term borrowings of $133,497 (2017 $nil) arose due to timing differences in relation to access to notice deposits, requiring
a 30 day facility to meet immediate cash requirements. This was closed off at 31 January 2019 when term deposits fell due.
Ethernity Networks
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
11
The Intangible Asset on the Balance Sheet at a carrying value of $6,869,815 (2017 $3,170,553) is a result of the Company
having adopted from 2015, the provisions of IAS38 relating to the recognition of Development Expenses. The useful life and
the amortization method of each of the intangible assets with finite lives are reviewed at least at each financial year end. If the
expected useful life of an asset differs from the previous estimate, the amortization period is changed accordingly. Such change
is accounted for as a change in accounting estimate in accordance with IAS 8. The Company undertook a comprehensive internal
modelling exercise to assess the fair value of the Intangible Asset and based on this Management are in their view, satisfied with
the continued practice of capitalising costs in terms of IAS38.
Other than that as discussed above, there are no items on the Balance Sheet that warrant further discussion outside of the
disclosures made in the Annual Financial statements on pages 21 to 66 of this Annual Report.
David Levi
Chief Executive Officer
Mark Reichenberg
Chief Financial Officer
11 June 2019
11 June 2019
Annual Report and Financial Statements for the year ended 31 December 2018 12
Board of Directors
Graham Woolfman FCA (Non-Executive Chairman)
Graham Woolfman joined the Company as an Independent Non-executive
Director and Chairman with effect from Admission. Graham is a Fellow of the
Institute of Chartered Accountants in England and Wales, and previously a Partner
and head of Corporate Finance at Levy Gee. He has over 25 years’ experience
advising and supporting growth businesses and was a founder Director of
Gateway VCT plc. Graham is currently the Managing Director of Intrust Corporate
Finance Limited, and a non-executive director of Filta Group Holdings plc quoted
on AIM, and Catalyst Housing Group, a substantial Public Interest Entity (PIE).
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 36 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. Mark Reichenberg
joined the Company in December 2016 as an advisor and consultant to the
IPO process and was appointed CFO of the Company in March 2017, joining
the board with effect from Admission. 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 components
and system level. Prior to Ethernity Networks, Shavit served as Chief Architect at
Native Networks, a start-up company developing products for Metro Ethernet
market. Prior to this, in 2002, Shavit established Crescendo Networks, a start-up
company enhancing data centre applications performance. Prior to the venture at
Crescendo, Shavit served as R&D Director at ECI Telecom, where he was in charge
of 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.
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Neil Rafferty (Independent Non-Executive Director)
Neil Rafferty joined Ethernity as an Independent Non-executive Director with
effect from Admission. 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 Saft-Feiglin is a lawyer and notary admitted in Israel with more than
20 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 Defence 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.
Annual Report and Financial Statements for the year ended 31 December 2018 14
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”).
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, can be found
on the Company`s Website section for Investors, specifically the corporate governance disclosures at www.ethernitynet.com/
corporate-governance.
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, Graham Woolfman (Chairman), Neil Rafferty, Chen Saft-Feiglin and Zohar Yinon. The balance between executive and
non-executive directors does not allow 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 Committee and
Remuneration Committee must each include all of the External Directors (including one External Director serving as the chair
of the Audit Committee and Remuneration Committee), and a majority of the members of each of the Audit Committee and
Remuneration Committee must comply with the director independence requirements prescribed by the Companies Law.
Ethernity Networks
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FINANCIAL STATEMENTS
15
The detailed composition of the board is as follows:
Graham Woolfman
Independent Non-Executive Chairman
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
Nomination Committee member
Mark Reichenberg
Chief Financial Officer and Company Secretary
Shavit Baruch
Neil Rafferty
Chen Saft Feiglin
Zohar Yinon
Vice President R&D
Independent Non-Executive Director
Audit Committee member
Remuneration Committee member
Nomination Committee member
External Director
Remuneration Committee Chairman
Audit Committee member
External Director
Audit Committee Chairman
Remuneration Committee member
Biographical details of all the Directors are set out on page 12.
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.
Annual Report and Financial Statements for the year ended 31 December 2018 16
Corporate Governance Statement
During 2018, the Board met on nine occasions. Board members also hold ad hoc telephone calls amongst themselves to
discuss governance, financial, operational and other business matters, between formal Board meetings. A majority of the Board
members constitutes the legal quorum for a board meeting, and all but one Board member 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 2018 was as
follows:
Number of meetings
Graham Woolfman
David Levi
Mark Reichenberg
Shavit Baruch
Neil Rafferty
Chen Saft-Feiglin
Zohar Yinon
Notes:
Board Audit Committee
9
9
9
9
9
9
8
9
4
2 (as invitee)
1 (as invitee)
4 (as invitee)
4
4
4
Remuneration
Committee
2
1 (as invitee)
1 (as invitee)
2
2
2
Nominations
Committee
(Note 1)
1
1
1
1 (as invitee)
1
1.
There was no formal requirement for any Nominations Committee meetings during the period under review. With the consent of the Board,
the Nominations Committee was requested to assist the Executive Management in the appointment of a Director of Finance to report to the
CFO.
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.
Board Committees
The Board has established properly constituted Audit, Remuneration and Nomination Committees of the Board with formally
delegated duties and responsibilities.
Audit Committee
The UK Corporate Governance Code recommends that an audit 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 Committee, which comprises the Independent Non-Executive and External Directors (excluding the Chairman) and the
Internal Auditor of the Company (if one is appointed) is chaired by Zohar Yinon with the remaining members being Chen Saft-
Feiglin and Neil Rafferty. The Committee invites other members of the Board and the Auditors to attend meetings as appropriate.
The Audit Committee has responsibilities which include the review of:
• The Company’s internal control environment;
• Financial risks.;
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• Financial statements, reports and announcements, including the Board’s responsibility to present an annual report that is
fair, balanced and understandable. The Audit Committee evidences this review in a report to the Board following its meeting
with the auditors to discuss their Report to the Audit 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;
• 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 2018, the Audit Committee met on four occasions and the matters considered included the
following:
• Appointment of an Internal auditor for the Company, and receipt of the Internal auditor`s report on controls and utilisation
of funds deployed post IPO;
• Consideration of the Company`s annual audited financial statements for the year ended 31 December 2017, unaudited six
months financial statements to 30th June 2018, and recommendation to the Board for publication;
• Audit planning and review meetings with Fahn Kanne & Co. Grant Thornton Israel and their continuation for appointment as
external auditors.
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 remuneration policy for directors and executives 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 2018, the remuneration Committee met on two occasions and confirmed the following;
• Recommendation to the Board of the granting of options and related terms to individuals eligible under the share option
scheme;
• Consideration and recommendation to the Board for the implementation of a Compensation Policy for Office Holders as
required by Israel Companies Law.
Annual Report and Financial Statements for the year ended 31 December 2018 18
Corporate Governance Statement
The Company is required in terms of Israel Companies Law to formulate and adopt a formal Compensation Policy for Office
Holders. The basis of this policy is to set the levels of remuneration of Office Holders, parameters relating to the structure of their
remuneration including any performance based compensation, be it cash or equity based. The policy further limits the Board
of Directors from applying any changes to office holder’s remuneration outside of the set parameters without bringing such
changes to a General Meeting of the Shareholders for approval.
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.
This Committee comprises Independent Non-Executive Directors and is chaired by Graham Woolfman with Neil Rafferty as the
other member.
During the year ended 31 December 2018, there were no formal requirements for the Nomination Committee to meet. The
Committee was however tasked by the Board of Directors to assist the Company’s CEO and CFO in the appointment of a
Director of Finance as an assistant to the CFO. This process was duly concluded and the Company appointed a Director of
Finance effective January 2019.
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
During the first quarter of 2019, the Internal Audit position was vacated. As internal audit is a requirement in terms of Israel
Companies law, a replacement independent Internal Auditor will be engaged during the second half of the 2019 year.
Insurance
The Company maintains appropriate insurance cover in respect of litigation against the Directors and Officers of the Company.
Ethernity Networks
STRATEGIC REPORT
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FINANCIAL STATEMENTS
19
Directors’ Report
The Directors present their Annual Report and audited Financial Statements for the financial year ended 31 December 2018.
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
virtualization of networking functionality.
The Company is headquartered in Israel.
Results and Dividends
The Consolidated Statement of Comprehensive Income for the year is set out on page 26. No dividend is proposed for the year.
Risk Management
The Company’s policies for managing risk arising from activities are set out in Note 27 of the Financial Statements.
Directors
The current Directors of the Company are:
Graham Woolfman 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*
* 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 29D
of the financial statements.
Annual Report and Financial Statements for the year ended 31 December 2018
20
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.
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;
• 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.
Ethernity Networks STRATEGIC REPORT
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FINANCIAL STATEMENTS
21
Independent Auditor’s Report to the Shareholders of
Ethernity Networks Ltd.
Independent Auditor’s Report
Ethernity Networks Ltd.
Report on the audit of the financial statements
Opinion
We have audited the financial statements of Ethernity Networks Ltd. (the “Company”), which comprise the Statements of
financial position as of 31 December 2018 and 2017 and the Statements of comprehensive income, the Statements of changes
in equity and the statements of cash flows for each of the years 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 2018 and 2017 and its financial performance and its cash flows for each of the years then ended in
accordance with International Financial Reporting Standards (IFRSs).
Basis for opinion
We conducted our audits 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’ Code of Ethics
for Professional Accountants (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 the IESBA Code. We believe that
the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
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 of the year ended 31 December 2018. 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. For
each matter below, our description of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the financial statements section
of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to
respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures,
including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying
financial statements.
Annual Report and Financial Statements for the year ended 31 December 2018 22
Independent Auditor’s Report to the Shareholders of
Ethernity Networks Ltd.
Description of Key Audit Matter and why a matter of
most significance in the audit
Description of Auditor’s Response and Key
Observations
Intangible assets
The intangible assets include development costs that
are directly attributable to a project’s development
phase, provided they met the recognition requirements
in accordance with International Accounting
Standard (IAS) 38 ‘Intangible Assets’. As such,
there is inherent risk that intangible assets may be
improperly capitalized. Also, such intangible assets
not yet available for use are required to be tested
for impairment irrespective of whether there is any
indication of impairment. Both the capitalization and
impairment of intangible assets involve significant
management judgement and therefore identified
capitalization and impairment of intangible assets as a
significant risk, which was one of the most significant
assessed risks of material misstatement
Deferred tax assets
The extent to which deferred tax assets can be
recognised is based on management assessment of
the probability that future taxable income will be
available against which the tax loss carry-forwards and
the deductible temporary differences can be utilized.
This involves significant management judgement and
therefore identified valuation of deferred tax assets as
a significant risk, which was one of the most significant
assessed risks of material misstatement
Our audit work included, but was not restricted to:
In 2018, in order to gain the required level of
assurance, we performed substantive audit procedures
relating to the capitalization of the intangible
assets. We specifically tested that those capitalized
development costs met the required criteria as outlined
by IAS 38, as further described in Note 2.I. to the
Company’s financial statements.
We also assessed the recoverability of these assets by
reviewing management’s estimation of the value in
use. Such evaluation includes assessment of evidence
obtained from various areas of the audit including cash
flows forecasts of revenue, expenses and profitability,
the appropriateness of discount rates used related to
the capitalized intangible assets, the most recent and
updated business plans and the compliance with the
requirements of IAS 36, impairment of assets.
We have considered management’s assessment and
based on the audit work performed we have not
identified anything to suggest that the capitalization of
development costs and the impairment test intangibles
were not performed by the Company in accordance
with the applicable requirements under International
Financial Reporting Standards
Our audit work included, but was not restricted to:
We evaluated and tested the recognition and
measurement of the deferred tax assets and the
underlying assumptions in management’s forecasted
future taxable income and in order to determine that
the deferred tax assets are recognised to the extent
that it is probable it will be realised. Such evaluation
includes assessment of evidence obtained from various
areas of the audit including cash flows forecasts,
business plans and our knowledge of the business.
We also assessed the adequacy of the Company’s
disclosures in Note 25 to the financial statements to
ensure these were in accordance with IAS 12 ‘Income
tax’.
Our testing did not identify any material misstatements
related to the accounting of deferred tax assets.
Ethernity Networks STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
23
Other information included in the Company’s 2018 Annual Report
Other information consists of the information included in the Company’s 2018 Annual Report other than the financial
statements and our auditor’s report thereon. Management is responsible for the other information.
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 scepticism 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.
Annual Report and Financial Statements for the year ended 31 December 2018 24
Independent Auditor’s Report to the Shareholders of
Ethernity Networks Ltd.
•
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 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 2018 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, 11 June 2019
Ethernity Networks STRATEGIC REPORT
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FINANCIAL STATEMENTS
25
Statements of Financial Position
For the year ended 31 December 2018
ASSETS
Current
Cash and cash equivalents
Other short-term financial assets
Trade receivables
Inventories
Other current assets
Current assets
Non-Current
Property and equipment
Deferred tax assets
Intangible asset
Non-current assets
Total assets
LIABILITIES AND EQUITY
Current
Short Term Borrowings
Trade payables
Other current liabilities
Warrants liability, at fair value
Current liabilities
Non-Current
IIA royalty liability
Long Term Borrowings
Non-current liabilities
Total liabilities
Equity
Share capital
Share premium
Other components of equity
Accumulated deficit
Total equity
Total liabilities and equity
The accompanying notes are an integral part of the financial statements.
US dollars
31 December
Notes
2018
2017
4
5
6
7
8
24
9
10
11
12
13
14
16
473,815
8,083,709
642,085
116,012
409,250
9,724,871
606,057
800,000
6,869,815
8,275,872
3,881,106
11,069,472
513,965
–
438,265
15,902,808
155,840
800,000
3,170,553
4,126,393
18,000,743
20,029,201
133,497
288,308
1,084,728
–
1,506,533
–
225,087
931,771
15,770
1,172,628
6,578
–
6,578
–
7,522
7,522
1,513,111
1,180,150
8,039
23,396,310
760,849
(7,677,566)
8,028
23,356,078
615,322
(5,130,377)
16,487,632
18,849,051
18,000,743
20,029,201
Annual Report and Financial Statements for the year ended 31 December 2018 26
Statements of Comprehensive Income
For the year ended 31 December 2018
Revenue
Cost of sales
Gross profit
Research and development expenses
General and administrative expenses
Impairment losses of financial assets
Marketing expenses
Other income
Operating profit (loss)
Financing costs
Financing income
Net comprehensive income (loss) for the year
Basic earnings (loss) per ordinary share
Diluted earnings (loss) per ordinary share
US dollars
For the year ended
31 December
2018
2017
1,123,707
1,518,661
311,194
214,439
812,513
1,304,222
473,489
215,778
1,291,175
(*) 554,645
132,799
(*) 37,258
1,804,886
556,588
(104,105)
(212,266)
(2,785,731)
152,219
(15,450)
253,992
(2,547,189)
(85,727)
92,979
159,471
(0.08)
(0.08)
0.01
0.01
Notes
18, 27
19
20
20
21
22
23
24
26
26
Weighted average number of ordinary shares for basic earning or loss per share
32,526,149
25,397,245
(*) – reclassified
The accompanying notes are an integral part of the financial statements.
Ethernity Networks Statements of Comprehensive Income
For the year ended 31 December 2018
Statements of Changes in Equity
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
27
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Annual Report and Financial Statements for the year ended 31 December 2018
28
Statements of Cash Flows
For the year ended 31 December 2018
Operating activities
Profit (loss) before tax
Non-cash adjustments
Depreciation of property and equipment
Capital gain from sale of vehicle
Share-based compensation
Amortisation of intangible assets
Amortisation of liabilities
IPO related costs
Foreign exchange gains on cash balances
Net changes in working capital
Increase in trade receivables
Increase in inventories
Decrease (increase) in other current assets
Increase in trade payables
Increase (decrease) in other liabilities
Net cash used in operating activities
Investing activities
Decrease (Increase) of other short-term financial assets
Purchase of property and equipment
Proceeds from sale of vehicle
Amounts carried to intangible assets
Participating grants in intangible assets
Net cash used in investing activities
Financing activities
Proceeds from exercise of options
Repayment of IIA liability
Proceeds from (repayment of) short term borrowings
Repayment of long term borrowings
Repayment of shareholder loans
Net proceeds from issuing ordinary shares
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Exchange differences on cash and cash equivalents
Cash and cash equivalents, end of year
Supplementary information:
Interest paid during the year
Interest received during the year
Supplementary information on non cash activities:
Share-based compensation capitalised to intangible assets
The accompanying notes are an integral part of the financial statements.
US dollars
For the year ended
31 December
2018
2017
(2,547,189)
159,471
100,918
–
5,031
322,724
(13,255)
(9,514)
(24,517)
(128,120)
(116,012)
29,015
63,221
162,320
(2,155,378)
20,171
(8,648)
69,178
116,064
(13,792)
–
–
(245,656)
–
(409,540)
103,127
(227,624)
(437,249)
2,985,763
(551,135)
–
(3,835,583)
–
(11,010,954)
(126,423)
28,999
(1,958,997)
95,820
(1,400,955)
(12,971,555)
3,850
(5,300)
133,497
(7,522)
–
–
124,525
(3,431,808)
3,881,106
24,517
473,815
(93,034)
(128,969)
(122,613)
(527,568)
17,826,371
16,954,187
3,545,383
335,723
–
3,881,106
813
197,949
21,918
69,472
186,403
117,542
Ethernity Networks Statements of Cash Flows
For the year ended 31 December 2018
Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
29
NOTE 1 – NATURE OF OPERATIONS
ETHERNITY NETWORKS LTD. (hereinafter: the “Company”), was incorporated in Israel on the 15th of December 2003 as
Neracore Ltd. The Company changed its name to ETHERNITY NETWORKS LTD. on the 10th of August 2004.
The Company develops and delivers high-end network processing technology for Carrier Ethernet switching, including
broadband access, mobile backhaul, Carrier Ethernet demarcation and data centres. The Company’s customers are situated
throughout the world.
In June 2017 the Company completed an Initial Public Offering (“IPO”) together with being admitted to trading on the
AIM Stock Exchange and issued 10,714,286 ordinary shares at a price of GBP 1.40 per share, for a total consideration of
approximately $19,444,000 (GBP 15,000,000) before underwriting and issuance expenses. Total net proceeds from the issuance
amounted to approximately $17,800,000.
NOTE 2 – SUMMARY OF ACCOUNTING POLICIES
The following accounting policies have been consistently applied in the preparation and presentation of these financial
statements for all of the periods presented, unless otherwise stated. In 2018, new standards and amendments became effective
but they had no material effect on the financial statements.
A. Basis of presentation of the financial statements and statement of compliance with IFRS
These financial statements have been prepared in accordance with International Financial Reporting Standards (hereinafter –
“IFRS”), as issued by the International Accounting Standards Board (“IASB”).
The financial information has been prepared on the historical cost basis.
The Company has elected to present profit or loss items using the function of expense method. Additional information regarding
the nature of the expenses is included in the notes to the financial statements.
The financial statements for the year ended 31 December 2018 (including comparative amounts) were approved and authorised
for issue by the board of directors on 11 June 2019.
B. Use of significant accounting estimates and assumptions and judgements
The preparation of financial statements in conformity with IFRS requires management to make accounting estimates and
assessments that involve use of judgment and that affect the amounts of assets and liabilities presented in the financial
statements, the disclosure of contingent assets and liabilities at the dates of the financial statements, the amounts of revenues
and expenses during the reporting periods and the accounting policies adopted by the Company. Actual results could differ from
those estimates.
Estimates and judgements are continually evaluated and are based on prior experiences, various facts, external items and
reasonable assumptions in accordance with the circumstances related to each assumption.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
period in which the estimates are revised and in any future periods affected.
Regarding significant judgements and estimate uncertainties, see Note 3.
C.
Functional and presentation currency
The Company prepares its financial statements on the basis of the principal currency and economic environment in which it
operates (hereinafter - the “functional currency”).
The Company’s financial statements are presented in US dollars (“US$”) which constitutes the functional currency of the
Company and the presentation currency of the Company.
Annual Report and Financial Statements for the year ended 31 December 2018 30
30
Notes to the Financial Statements
For the year ended 31 December 2018
D. Foreign currency transactions and balances
Specifically identifiable transactions denominated in foreign currency are recorded upon initial recognition at the exchange rates
prevailing on the date of the transaction. Exchange rate differences deriving from the settlement of monetary items, at exchange
rates that are different than those used in the initial recording during the period, or than those reported in previous financial
statements, are recognised in the statement of comprehensive income in the year of settlement of the monetary item. Other
profit or loss items are translated at average exchange rates for the relevant financial year.
Assets and liabilities denominated in or linked to foreign currency are presented on the basis of the representative rate of
exchange as of the date of the statement of financial position (spot exchange rate as published by the Bank of Israel).
Exchange rate differentials are recognised in the financial statements when incurred, as part of financing expenses or financing
income, as applicable.
The exchange rates as at the 31st of December, of one unit of foreign currency to each US dollar, were:
New Israeli Shekel (“NIS”)
EURO
Sterling
E. Cash and cash equivalents
2018
0.267
1.279
1.145
2017
0.288
1.200
1.350
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
Testing equipment
Vehicles
Furniture and equipment
Leasehold improvements
%
33
10–33
15
6–15
10
Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term (including any extension
option held by the Company and intended to be exercised) and the expected life of the improvement.
Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is
derecognised. An asset is derecognised on disposal or when no further economic benefits are expected from its use.
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
31
G. Basic and diluted earnings per share
Basic and diluted earnings per share is computed by dividing the income for the period applicable to Ordinary Shares by the
weighted average number of shares of Ordinary Shares outstanding during the period. Securities that may participate in
dividends with the Ordinary Shares (such as the Preferred Shares) were included in the computation of basic earnings per share
using the two class method.
In computing diluted earnings per share, basic earnings per share are adjusted to reflect the potential dilution that could occur
upon the exercise of options or warrants issued or granted using the “treasury stock method” and upon the conversion of
Preferred Shares (until the first half of 2017) using the “if-converted method”, if the effect of each of such financial instruments
is dilutive.
H. Severance pay liability
The Company’s liability for severance pay pursuant Israel’s Severance Pay Law is based on the last monthly salary of the employee
multiplied by the number of years of employment, as of the date of severance.
Pursuant to section 14 of Severance Pay Law, which covers the Company’s employees, monthly deposits with insurance
companies release the Company from any future severance obligations in respect of those employees (defined contribution).
Deposits under section 14 are recorded as an expense in the Company’s statement of comprehensive income.
I.
Research and development expenses
Expenditures on the research phase of projects to develop new products and processes are recognised as an expense as incurred.
Development activities involve a plan or a design for the production of new or substantially improved products and processes.
Development costs that are directly attributable to a project’s development phase are recognised as intangible assets, provided
they meet the following recognition requirements:
•
•
•
•
•
the development costs can be measured reliably
the project is technically and commercially feasible
the Company intends to and has sufficient resources to complete the project
the Company has the ability to use or sell the developed asset
the developed asset will generate probable future economic benefits. Development costs not meeting these criteria for
capitalisation are expensed as incurred.
Directly attributable costs include employee costs incurred on software development along with an appropriate portion of
relevant overheads and borrowing costs.
An intangible asset that was capitalized but not available for use, is not amortised and is subject to impairment testing once
a year or more frequently if indications exist that there may be a decline in the value of the asset until the date on which it
becomes available for use.
The amortisation of an intangible asset begins when the asset is available for use, i.e., it is in the location and condition needed
for it to operate in the manner intended by management. The development asset is amortised on the straight-line method, over
its estimated useful life, which is estimated to be ten years.
The useful life and the amortisation method of each of the intangible assets with finite lives are reviewed at least at each
financial year end. If the expected useful life of an asset differs from the previous estimate, the amortisation period is changed
accordingly. Such change is accounted for as a change in accounting estimate in accordance with IAS 8.
Annual Report and Financial Statements for the year ended 31 December 2018 32
32
Notes to the Financial Statements
For the year ended 31 December 2018
J. Government grants
Government grants are recognised where there is reasonable assurance that the grant will be received and all attached
conditions will be complied with. When the grant relates to an expense item (such as research and development of an intangible
asset), it is recognised as ‘other income’ on a systematic basis over the periods that the costs, which it is intended to compensate,
are expensed.
Where the grant relates to an asset (such as development expenses that were recognised as an intangible asset), it is recognised
a deduction of the related asset.
Grants from the Israeli Innovation Authority of the Ministry of Economy (hereinafter – the “IIA”) in respect of research and
development projects are accounted for as forgivable loans according to IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance.
Grants received from the IIA are recognised as a liability according to their fair value on the date of their receipt, unless on that
date it is reasonably certain that the amount received will not be refunded. The fair value is calculated using a discount rate
that reflects a market rate of interest at the date of initial recognition. The difference between the amount received and the fair
value on the date of receiving the grant is recognised as a deduction from the cost of the related asset or as other income, as
applicable.
The amount of the liability is re-examined each period, and any changes in the present value of the cash flows discounted at the
original interest rate of the grant are recognised in profit or loss.
The difference between the amount received and the fair value on the date of receiving the grant is recognised as a deduction of
research and development expenses.
Grants which do not include an obligation to pay royalties are recognised as a deduction of the related asset or as other income,
as applicable (See Note 22).
Financial instruments
K.
The accounting policy for financial instruments until December 31, 2017, is as follows:
Recognition, initial measurement and derecognition
Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of
the financial instrument and are measured initially at fair value adjusted for transaction costs, except for those carried at fair
value through profit or loss which are measured initially at fair value. Subsequent measurement of financial assets and financial
liabilities is described below.
Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when
the financial asset and substantially all the risks and rewards are transferred. A financial liability is derecognised when it is
extinguished, discharged, cancelled or expires.
Classification and subsequent measurement of financial assets
For the purpose of subsequent measurement financial assets are classified into the following categories upon initial recognition:
•
•
•
•
Loans and receivables
Financial assets at fair value through profit or loss (FVTPL)
Held-to-maturity (HTM) investments
Available-for-sale (AFS) financial assets
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
33
All financial assets except for those at FVTPL are reviewed for impairment at least at each reporting date to identify whether
there is any objective evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine
impairment are applied for each category of financial assets, which are described below.
All income and expenses relating to financial assets that are recognised in the statement of comprehensive income are presented
within financing expenses or financing income (except for impairment of trade receivables which is presented within general and
administrative expenses).
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market. After initial recognition, these are measured at amortised cost using the effective interest method, less provision for
impairment. Discounting is omitted where the effect of discounting is immaterial. The Company’s cash and cash equivalents,
trade receivables and most other receivables fall into this category of financial instruments. Individually significant receivables
are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty
will default. Receivables that are not considered to be individually impaired are reviewed for impairment in groups, which
are determined by reference to the industry and region of the counterparty and other shared credit risk characteristics. The
impairment loss estimate is then based on recent historical counterparty default rates for each identified group.
Allowance for doubtful accounts
The allowance for doubtful accounts is determined in respect of specific debts whose collection, in the opinion of the Company’s
management, is doubtful.
Financial assets at FVTPL
Financial assets at FVTPL include financial assets that are either classified as held for trading or that meet certain conditions
and are designated at FVTPL upon initial recognition. All derivative financial instruments fall into this category, except for those
designated and effective as hedging instruments, for which hedge accounting requirements apply. Assets in this category are
measured at fair value with profits or losses recognised in the statement of comprehensive income. The fair values of financial
assets in this category are determined by reference to active market transactions or using a valuation technique where no active
market exists.
During the year ended December 31, 2017 the Company did not have any assets held for trading and no assets were voluntarily
classified to FVTPL category.
Classification and subsequent measurement of financial liabilities
The Company’s financial liabilities include borrowings, trade payables, other payables, IIA royalty liability and derivative financial
instruments. Financial liabilities are measured subsequently at amortised cost using the effective interest method except for
derivatives and financial liabilities designated at FVTPL, which are carried subsequently at fair value with profits or losses
recognised in the statement of comprehensive income (other than derivative financial instruments that are designated and
effective as hedging instruments). All interest-related charges and, if applicable, changes in an instruments fair value that are
reported in the statement of comprehensive income, are included within finance costs or finance income.
Derivative financial instruments
Derivative financial instruments (including embedded derivatives that were separated from the host contract - see Note 12) were
accounted for at FVTPL except for derivatives designated as hedging instruments in cash flow hedge relationships, which require
a specific accounting treatment. To qualify for hedge accounting, the hedging relationship must meet several strict conditions
with respect to documentation, probability of occurrence of the hedged transaction and hedge effectiveness.
The Company did not designate derivatives as hedging instruments in the periods presented in these financial statements.
Annual Report and Financial Statements for the year ended 31 December 2018 34
34
Notes to the Financial Statements
For the year ended 31 December 2018
Derivatives embedded in host contracts are accounted for as separate derivatives if their economic characteristics and risks are
not closely related to those of the host contracts and the host contracts are not held-for- trading or designated at fair value
though profit or loss. These embedded derivatives are measured at fair value, with changes in fair value recognised in profit or
loss. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that
would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss.
During the reporting period, the entire amount of a warrant liability (a derivative which was separated from a host contract) was
derecognised to profit or loss (see also Note 12)
The accounting policy applied commencing from 1 January 2018
1. Classification and measurement of financial assets and financial liabilities
Initial recognition and measurement
The Company initially recognizes trade receivables on the date that they are originated. All other financial assets and financial
liabilities are initially recognized on the date on which the Company becomes a party to the contractual provisions of the
instrument. As a rule, a financial asset or a financial liability are initially measured at fair value with the addition, for a financial
asset or a financial liability that are not presented at fair value through profit or loss, of transaction costs that can be directly
attributed to the acquisition or the issuance of the financial asset or the financial liability. Trade receivables that do not contain a
significant financing component are initially measured at the price of the related transaction.
Financial assets – subsequent classification and measurement
On initial recognition, financial assets are classified to measurement at amortized cost.
Financial assets are not reclassified in subsequent periods, unless, and only to the extent that the Company changes its business
model for the management of financial debt assets, in which case the affected financial debt assets are reclassified at the
beginning of the reporting period following the change in the business model.
A financial asset is measured at amortized cost if it meets the two following cumulative conditions and is not designated for
measurement at fair value through profit or loss:
•
•
The objective of the entity’s business model is to hold the financial asset to collect the contractual cash flows; and
The contractual terms of the financial asset create entitlement on specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding.
The Company has balances of trade and other receivables and deposits that are held under a business model the objective of
which is collection of the contractual cash flows. The contractual cash flows in respect of such financial assets comprise solely
payments of principal and interest that reflects consideration for the time-value of the money and the credit risk. Accordingly,
such financial assets are measured at amortized cost.
Financial assets at amortized cost
In subsequent periods, these assets are measured at amortized cost, using the effective interest method and net of impairment
losses. Interest income, currency exchange gains or losses and impairment are recognized in profit or loss. Any gains or losses on
derecognition are also carried to profit or loss.
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
35
Financial assets at fair value through profit or loss
2.
In subsequent periods, these assets are measured at fair value. Net gains and losses are carried to profit or loss.
Financial liabilities – classification, subsequent measurement and gains and losses
Financial liabilities are classified to measurement at amortized cost or at fair value through profit or loss. Financial liabilities at
fair value through profit or loss are measured at fair value, and any net gains and losses, including any interest expenses, are
recognized in profit or loss. Other financial liabilities are measured at amortized cost in subsequent periods, using the effective
interest method. Interest expenses and currency exchange gains and losses are recognized in profit or loss. Any gains or losses on
derecognition are also carried to profit or loss.
Derecognition of financial liabilities
Financial liabilities are derecognized when the contractual obligation of the Company expires or when it is discharged or
canceled. Additionally, a significant amendment of the terms of an existing financial liability, or an exchange of debt instruments
having substantially different terms, between an existing borrower and lender, are accounted for as an extinguishment of the
original financial liability and the recognition of a new financial liability at fair value.
The difference between the carrying amount of the extinguished financial liability and the consideration paid (including any other
non-cash assets transferred or liabilities assumed), is recognized in profit or loss. In the event of a non-material modification
of terms (or exchange of debt instruments), the new cash flows are discounted at the original effective interest rate and the
difference between the present value of financial liability under the new terms and the present value of the original financial
liability is recognized in profit or loss.
Impairment
3.
Financial assets and contract assets
The Company creates a provision for expected credit losses in respect of:
•
•
Contract assets (as defined in IFRS 15).
Financial assets measured at amortized cost.
The Company has elected to measure the provision for expected credit losses in respect of trade receivables, contract assets at an
amount that is equal to the credit losses expected over the life of the instrument.
In assessing whether the credit risk of a financial asset has significantly increased since initial recognition and in assessing
expected credit losses, the Company takes into consideration information that is reasonable and verifiable, relevant and
attainable at no excessive cost or effort. Such information comprises quantitative and qualitative information, as well as an
analysis, based on the past experience of the Company and the reported credit assessment, and contains forward-looking
information.
Measurement of expected credit losses
Expected credit losses represent a probability-weighted estimate of credit losses. Credit losses are measured at the present value
of the difference between the cash flows to which the Company is entitled under the contract and the cash flows that the
Company expects to receive.
Expected credit losses are discounted at the effective interest rate of the financial asset.
Financial assets impaired by credit risk
At each reporting date, the Company assesses whether financial assets that are measured at amortized cost have become
impaired by credit risk. A financial asset is impaired by credit risk upon the occurrence of one or more of the events that
adversely affect the future cash flows estimated for such financial asset.
Annual Report and Financial Statements for the year ended 31 December 2018 36
36
Notes to the Financial Statements
For the year ended 31 December 2018
L.
Share-based compensation
Share-based compensation transactions that are settled by equity instruments that were executed with employees or others
who render similar services, are measured at the date of the grant, based on the fair value of the granted equity instrument.
This amount is recorded as an expense in profit or loss with a corresponding credit to equity, over the period during which the
entitlement to exercise or to receive the equity instruments vests.
For purposes of estimating the fair value of the granted equity instruments, the Company takes into consideration conditions
which are not vesting conditions (or vesting conditions that are performance conditions which constitute market conditions).
Non-market performance and service conditions are included in assumptions about the number of options that are expected
to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting
conditions are to be satisfied. At the end of each reporting period, an estimate is made of the number of instruments expected
to vest. Grants that are contingent upon vesting conditions (including performance conditions that are not market conditions)
which are not ultimately met are not recognised as an expense. A change in estimate regarding prior periods is recognised in the
statement of comprehensive income over the vesting period.
Share-based payment transactions settled by equity instruments executed with other service providers are measured at the date
the services were received, based on the estimated fair value of the services or goods received, unless their value cannot be
reliably estimated. In such a case, the transaction is measured by estimating the fair value of the granted equity instruments. This
amount is carried as an expense or is capitalized to the cost of an asset, based on the nature of the transaction. Share based
compensation amounts related to grants that were forfeited, are reclassified to Share Premium.
M. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
Fair value measurement is based on the assumption that the transaction will take place in the asset’s or the liability’s principal
market, or in the absence of a principal market. In the most advantageous market.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the
asset or liability, assuming that market participants act in their economic best interest.
Fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits
by using the asset in its best use or by selling it to another market participant that would use the asset in its best use.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to
measure fair value. Maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities measured at fair value or for which fair value is disclosed are categorized into levels within the fair value
hierarchy based on the lowest level input that is significant to the entire fair value measurement:
•
•
•
Level 1 – unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has the
ability to access as of the measurement date.
Level 2 – pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability or
indirectly observable through corroboration with observable market data.
Level 3 – pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if any,
market activity for the non-financial asset or liability at the measurement date. The inputs into the determination of fair
value require significant management judgment or estimation. Level 3 inputs are considered as the lowest priority within
the fair value hierarchy. The valuation of the short-term liability relating to the warrants and options issued, fell under this
category.
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
37
N. Off-set of financial instruments
Financial instruments and financial liabilities are presented in the statements of financial position at their net value if the
Company has a legal and enforceable right of offset and the Company intends on settling the asset and the liability on a net
basis or simultaneously.
O. Transactions with controlling shareholders
Transactions with controlling shareholders are recognised at fair value. Any difference between the fair value and the original
terms of the transaction, represent capital contribution or dividend, as applicable and accordingly, carried to equity.
P.
Revenue recognition
The Company generates revenues mainly from sales of programmable devices (“FPGA”) that embed intellectual property (“IP”)
developed by the Company, or IP developed by the Company together with software application tools, to assist its customers to
design their own systems based on the Company IP.
The accounting policy for revenue recognition until December 31, 2017 was as follows:
Revenues were measured in accordance with the fair value of the consideration received or receivable in respect of sales supplied
in the ordinary course of business, net of returns, rebates and discounts.
1. Sales of goods
Revenues from programmable devices were recognised when all of the following conditions are met:
•
•
•
•
•
The Company has transferred the significant risks and rewards of ownership of the goods to the purchasers. Such
condition is usually met on delivery of the goods, however, when a sales contract gives the customer the right, for a
specified period after delivery, to accept or reject goods, revenue recognition does not occur until the earlier of customer
acceptance and expiry of the acceptance period;
The Company does not retain continuing managerial involvement to the degree usually associated with ownership nor
effective control over the goods sold;
The amount of the revenues can be measured reliably. The amount of the revenue is not considered as being reliably
measured until all the conditions relating to the transaction are met. The Company based its estimates on past experience,
considering the type of customer, type of transaction and special details of each arrangement;
It is probable that the economic benefits that are associated with the transaction will flow to the Company; and
The costs incurred or to be incurred in respect of the transaction can be measured reliably.
2. Contracts with milestone payments
Certain contracts with major customers are structured to provide the Company with payment upon the achievements of certain
predefined milestones which might include development of new product offerings or new features of existing products such as
programmable devices (“design tools”).
If payments under the contract are dependent upon the achievement of certain milestones, the revenue is not recognised until
the relevant milestone has been achieved (as agreed between the Company and the customer), provided that the contract does
not provide cancellation rights to the customer that would require the repayment of any amounts received.
Amounts received prior to achieving a predefined milestone, including up-front payments, are deferred and presented as
deferred revenues until the achievement of the related milestone.
Amounts received under contracts that allow the customer, for a specified period after delivery, acceptance or cancellation
rights, are deferred and presented as deferred revenues until the earlier of, the customer formal acceptance, or, the expiry of the
acceptance or cancellation period. As at 31 December 2017 no amounts were required to be presented as deferred revenues.
Contract costs are recognised in the period in which they are incurred.
Annual Report and Financial Statements for the year ended 31 December 2018 38
38
Notes to the Financial Statements
For the year ended 31 December 2018
3. Multiple element transactions
In certain instances, the Company enters into an agreement to sell programmable devices together with the development of new
product offerings or new features of existing products (“design tools”).
In those cases, the Company allocates the consideration received to the different elements and the revenues are recognised in
respect of each element separately. Accordingly, revenue allocated to design tools elements are recognised upon achievement
of milestones as described above. Revenue allocated to programmable devices elements are recognised upon delivery, after all
of the above criteria (under sales of goods) are met. An element constitutes a separate accounting unit if and only if it has a
separate value to the customer. Revenue from each element is recognised when the criteria for revenue recognition have been
met (as described above) and only to the extent of the consideration that is not contingent upon the completion or performance
of future services in the contract.
4. Revenue from royalties
Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant transaction with the customer.
Such revenues are recognised provided the amount of the revenues can be measured reliably and it is considered probable that
the economic benefits that are associated with the transaction will flow through to the Company. Royalties are received on the
sales of third parties that are based on IP developed by the Company. Royalties are calculated from royalty reports delivered to
the Company on a quarterly basis.
Accounting policy applied commencing from 1 January 2018
The Company recognises revenue when customer obtains control over the promised goods or services. The revenue is measured
according to the amount of the consideration to which the Company expects to be entitled in exchange for the goods or services
promised to the customer.
Identification of the contract
The Company treats a contract with a customer only where all of the following conditions are fulfilled:
1.
The parties to the contract have approved the contract (in writing, orally or according to other customary business
practices) and they are committed to satisfying their obligations thereunder;
2.
The Company is able to identify the rights of each party in relation to the goods or services that are to be transferred;
3.
The Company is able to identify the payment terms for the goods or services that are to be transferred;
4.
5.
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
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.
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
39
The Company identifies goods or services promised to the customer as being distinct when the customer can benefit from the
goods or services on their own or in conjunction with other readily available resources and the Company’s promise to transfer
the goods or services to the customer separately identifiable from other promises in the contract. In order to examine whether a
promise to transfer goods or services is separately identifiable, the Company examines whether it is providing a significant service
of integrating the goods or services with other goods or services promised in the contract into one integrated outcome that is
the purpose of the contract.
Determination of the transaction price
The transaction price is the amount of the consideration to which the Company expects to be entitled in exchange for the
goods or services promised to the customer, other than amounts collected for third parties. The Company takes into account the
effects of all the following elements when determining the transaction price; variable consideration, the existence of a significant
financing component, non-cash consideration, and consideration payable to the customer.
Variable consideration
The transaction price includes fixed amounts and amounts that may change as a result of discounts, credits, price concessions,
incentives, penalties, claims and disputes and contract modifications where the consideration in their respect has not yet been
agreed to by the parties.
The Company includes the amount of the variable consideration, or part of it, in the transaction price only when it is considered
highly probable that its inclusion will not result in a significant revenue reversal in the future when the uncertainty has been
subsequently resolved. At the end of each reporting period and if necessary, the Company revises the amount of the variable
consideration included in the transaction price.
Satisfaction of performance obligations
Revenue is recognised when the Company satisfies a performance obligation by transferring control over promised goods or
services to the customer, as applicable.
Contract costs
Incremental costs of obtaining a contract with a customer, such as sales fees to agents, are recognised as an asset when the
Company is likely to recover these costs. Costs to obtain a contract that would have been incurred regardless of the contract are
recognised as an expense as incurred, unless the customer can be billed for those costs.
Costs incurred to fulfill a contract with a customer and that are not covered by another standard are recognised as an asset
when they: relate directly to a contract the Company can specifically identify; they generate ore enhance resources of the
Company that will be used in satisfying performance obligations in the future; and they are expected to be recovered. In any
other case the costs are recognised as an expense as incurred.
Capitalized costs are amortised in the statement of income on a systematic basis that is consistent with the pattern of transfer of
the goods or services to which the asset relates.
In every reporting period, the Company examines whether the carrying amount of the asset recognised as aforesaid exceeds the
consideration the entity expects to receive in exchange for the goods or services to which the asset relates, less the costs directly
attributable to the provision of these goods or services that were not recognised as expenses, and if necessary an impairment loss
is recognised in the statement of income.
Annual Report and Financial Statements for the year ended 31 December 2018 40
40
Notes to the Financial Statements
For the year ended 31 December 2018
Contract modification
A contract modification is a change in the scope or price (or both) of a contract that was approved by the parties to the contract.
A contract modification can be approved in writing, orally or be implied by customary business practices.
When a contract modification has not yet been approved by the parties, the Company continues to recognise revenues
according to the existing contract, while disregarding the contract modification, until the date the contract modification is
approved or the contract modification is legally enforceable.
The Company accounts for a contract modification as an adjustment of the existing contract since the remaining goods or
services after the contract modification are not distinct and therefore constitute a part of one performance obligation that is
partially satisfied on the goods that are expected to be returned, instead of revenue, the Company recognises a refund liability.
A right of return asset (and corresponding adjustment to cost of sales) is also recognised for the right to recover products from a
customer, date of the contract modification. The effect of the modification on the transaction price and on the rate of progress
towards full satisfaction of the performance obligation is recognised as an adjustment to revenues (increase or decrease) on the
date of the contract modification, meaning on a catch-up basis.
Sales of goods
Revenues from sale of programmable devices are recognised at the point in time when control of the asset is transferred to the
customer, generally on delivery of the devices.
Certain contracts provide a customer with a right to return the goods within a specified period. The Company uses the
expected value method to estimate the goods that will not be returned because this method best predicts the amount of
variable consideration to which the Company will be entitled. The requirements in IFRS 15 on constraining estimates of variable
consideration are applied with respect to arrangements that provides such right of return, in order to determine the amount
of variable consideration that can be included in the transaction price. Accordingly, the Company recognize amounts subject
to right of return only if it is highly probable that there will not be a significant reversal of revenues if the estimate of expected
returns changes. As of December 31, 2018. there was no significant amount of goods that were subject to right of return.
Contracts with milestone payments
Certain contracts with major customers are structured to provide the Company with payment upon the achievements of certain
predefined milestones which might include development of new product offerings ore new features of existing products such as
programmable devices (“design tools”).
Management has determined that the performance obligation under such arrangements is satisfied over time.
As payments under the contract are dependent upon the Company’s achievement of certain milestones, and as the payments
are generally designed to depict the Company’s performance under the arrangements, the Company measures progress toward
satisfying the performance obligation based on the results actually achieved (i.e. the achievements of milestones) using the
output method. Amounts received (including up-front payments), which relate to milestones that were non achieved yet, are
deferred and presented as deferred revenues.
Multiple element transactions
Some of the Company’s contracts with customers contain multiple performance obligations. For these contracts, we account for
individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance
obligations on a relative standalone selling price basis. The Company determine the standalone selling prices based on our overall
pricing objectives, taking into consideration market conditions and other factors.
Revenues are then recognized for each separate performance obligations – sales of goods or designed tools, based on the criteria
described in the above paragraph.
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
41
Revenue from royalties
The Company is entitled to royalties based on sales by third parties, of products which consist 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
recognizes revenue at the later of (i) when the performance obligation to which some or all of the royalty has been allocated has
been satisfied (or partially satisfied), or (ii) when the related sales occur.
Accordingly, revenues from royalties are recognized based on the actual sales of products as reported to the Company on a
quarterly basis.
Q.
Income taxes
Taxes on income in the statement of comprehensive income comprise current and deferred taxes. Deferred taxes are recognised
in the statement of comprehensive income, except to the extent that the tax arises from items which are recognised directly in
other comprehensive income or in equity. In such cases, the tax effect is also recognised in the relevant item.
Deferred tax assets are recognised to the extent that it is probable that the underlying tax loss or deductible temporary difference
will be utilised against future taxable income. This is assessed based on the Company’s forecast of future operating results,
adjusted for significant non-taxable income and expenses and specific limits on the use of any unused tax loss or credit. (See also
Note 25).
Deferred tax assets are presented in the statement of financial position as non-current assets.
R. Operating cycle
The normal operating cycle of the Company is a twelve-month period ending in December of each year.
S.
Impairment testing of other intangible assets and property and equipment
For impairment assessment purposes, assets are grouped at the lowest levels for which there are largely independent cash
inflows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-
generating unit level.
An impairment loss is recognised for the amount by which the asset’s (or cash-generating unit’s) carrying amount exceeds its
recoverable amount, which is the higher of fair value less costs of disposal and value-in-use. To determine the value-in-use,
management estimates expected future cash flows from each asset or cash-generating unit and determines a suitable discount
rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly
linked to the Company’s latest approved budget, adjusted as necessary to exclude the effects of future reorganisations and
asset enhancements. Discount factors are determined individually for each cash-generating unit and reflect current market
assessments of the time value of money and asset-specific risk factors.
T. Ordinary shares
Ordinary shares issued by the Company which do not meet the definition of financial liability or financial asset, were recognised
as part of equity on the basis of the consideration received in respect thereof, net of costs attributed directly to the issue.
U. Equity and reserves
Share capital represents the nominal par value of shares that have been issued.
Share premium includes any premiums received on issue of share capital. Any transaction costs associated with the issuing of
shares are deducted from share premium, net of any related income tax benefits.
Annual Report and Financial Statements for the year ended 31 December 2018 42
42
Notes to the Financial Statements
For the year ended 31 December 2018
V.
Provisions, contingent assets and contingent liabilities
Provisions for legal disputes, onerous contracts or other claims are recognised when the Company has a present legal or
constructive obligation as a result of a past event, it is probable that an outflow of economic resources will be required and
amounts can be estimated reliably. Timing or amount of the outflow may still be uncertain.
No liability is recognised if an outflow of economic resources as a result of present obligations is not probable. Such situations
are disclosed as contingent liabilities unless the outflow of resources is remote.
Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable
evidence available at the reporting date, including the risks and uncertainties associated with the present obligation. Where there
are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the
class of obligations as a whole. Provisions are discounted to their present values, where the time value of money is material.
Any reimbursement that the Company is virtually certain to collect from a third party with respect to the obligation is recognised
as a separate asset. However, this asset may not exceed the amount of the related provision.
W.
New and revised standards that are effective for annual periods beginning on or after 1 January
2018
IFRS 15 ‘Revenue from Contracts with Customers’
IFRS 15 ‘Revenue from Contracts with Customers’ and the related ‘Clarifications to IFRS 15 Revenue from Contracts with
Customers’ (hereinafter referred to as ‘IFRS 15’) replace IAS 18 ‘Revenue’, IAS 11 ‘Construction Contracts’, and several revenue-
related Interpretations. The new Standard has been applied retrospectively without restatement, with the cumulative effect of
initial application recognised as an adjustment to the opening balance of retained earnings at 1 January 2018. In accordance
with the transition guidance, IFRS 15 has only been applied to contracts that are incomplete as at 1 January 2018.
The Standards presents a new five-step model for the recognition of revenue from contracts with customers:
1.
Identifying the contract with the customer.
2.
Identifying separate performance obligations in the contract.
3.
Determining the transaction price.
4.
Allocating the transaction price to separate performance obligations.
5.
Recognizing revenue when the performance obligations are satisfied.
The adoption of IFRS 15 did not have material impact on the Company’s revenue streams and selling contracts, the financial
reporting and disclosers and on the business processes, control and systems. Thus, the adoption of IFRS 15 did not have material
impact on the financial statement.
Presented in Note 2.P. are the principals of the new revenue recognition accounting policy, commencing on 1 January 2018, as
applied following the adoption of IFRS 15.
IFRS 9 ‘Financial Instruments’
The new standard for financial instruments (IFRS 9) replaced IAS 39 ‘financial Instrument: Recognition and Measurement’. It
makes major changes to the previous guidance on the classification and measurement of financial assets and introduces an
‘expected credit loss’ model for the impairment of financial assets.
IFRS 9 also contains new requirements on the application of hedge accounting. The new requirements look to align hedge
accounting more closely with entities’ risk management activities by increasing the eligibility of both hedged items and hedging
instruments and introducing a more principles-based approach to assessing hedge effectiveness.
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
43
The following areas identified as the most impact by the application of IFRS9:
•
•
The classification and measurement of the Company’s financial assets. Management holds financial assets to hold and
collect the associated cash flows. However, management has determined that the majority of financial assets held by
Company as the adoption date (including the Company’s major investment in short term deposit) are eligible to be
accounted for at amortised cost in accordance with the previous IFRS. Accordingly, the new guidance did not affect the
classification and measurement of these financial assets.
The impairment of financial assets applying the expected credit loss model. This applies to the Company’s trade receivables
and other short term investments in debt-type assets that were previously classified as ‘Loan and Receivable’. For
contract assets that will arise from IFRS 15 and trade receivables, the Company determined to apply a simplified model of
recognizing lifetime expected credit losses as these items do not have a significant financing component.
The new standard also introduces expanded requirements and changes in presentation. These are expected to change the nature
and extent of the Company’s disclosures about financial instruments in its annual financial instruments.
The Company applied IFRS 9, retrospectively from 1 January 2018, with the practical expedients permitted under the standard.
Comparative for 2017 were not be restated.
The adoption did not have a material impact on the Company’s financial statements.
X.
Standards, amendments and interpretations to existing standards that are not yet effective and
have not been adopted early by the Company
IFRS 16 ‘Leases’
IFRS 16 will replace IAS 17 ‘Leases’ and three related interpretations. It completes the IASB’s long running project to overhaul
lease accounting. in accordance with IFRS 16, Leases will be recorded in the statement of financial position in the form of a
right-of-use asset and a lease liability to pay rental. Two important reliefs provided by IFRS 16, are for assets of low value and
short-term leases of less than 12 months. Each lease payment is allocated between the liability and finance expenses, whereas
the finance expenses is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset’s useful life
and the lease term on a straight-ling basis.
The accounting for lessors will not significantly change.
In order to determine the impact of IFRS 16, the Company is required to perform a fill review of all agreements in order to assess
whether any additional contracts will now become a lease under IFRS 16’s new definition. The Company assesses whether a
contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a
period of time in exchange for consideration.
IFRS 16 is effective from periods beginning on or after 1 January 2019. Early adoption is permitted;
however, the Company has not elected to adopt it earlier than is required.
Management is in the process of assessing the full impact of the Standard. Currently, the Company:
•
•
has decided to make use of the practical expedient, allowing it to not perform a full review of existing leases and to apply
IFRS 16 only to new or modified contracts;
believes that the most significant impact will be that the Company will need to recognise a right of use asset and a lease
liability for the office and production buildings currently treated as operating leases. At 31 December 2018 the future
minimum lease payments amounted to $479,488. This will mean that the nature of the expense of the above cost will
change from being an operating lease expense to depreciation and interest expense;
Annual Report and Financial Statements for the year ended 31 December 2018 44
44
Notes to the Financial Statements
For the year ended 31 December 2018
The Company is planning to adopt IFRS 16 on 1 January 2019 using the Standard’s modified
retrospective approach. Under this approach the cumulative effect of initially applying IFRS 16 is recognised as an adjustment to
equity at the date of initial application. Comparative information is not restated.
Choosing this transitional approach, results in further policy decisions that the Company needs to make as there are several other
transitional reliefs that can be applied. These relate to those leases previously held as operating leases and can be applied on a
lease-by-lease basis. The Company is currently assessing the impact of applying these other transitional reliefs.
The Company estimates the effects of the IFRS 16 application, based on the present value calculation, as being an increase of
$444,788 for the right-of-use assets and corresponding lease liabilities, over the entire period of all the leases including any
options to extend the leases.
The Company estimates that applying the standard is expected to cause a decrease in lease expenses of approximately $125
thousand and an increase in depreciation expenses and financing expenses of a similar amount.
NOTE 3 – SIGNIFICANT MANAGEMENT JUDGEMENT IN APPLYING ACCOUNTING POLICIES AND
ESTIMATION UNCERTAINTY
When preparing the financial statements, management makes a number of judgements, estimates and assumptions about the
recognition and measurement of assets, liabilities, income and expenses.
Significant management judgement
•
Capitalisation of internally developed intangible assets
Distinguishing the research and development phases of a new or substantially improved customised research and development
project and determining whether the recognition requirements for the capitalisation of development costs are met, requires
judgement. After capitalisation, management monitors whether the recognition requirements continue to be met and whether
there are any indicators that capitalised costs may be impaired (see Note 9).
•
Recognition of deferred tax assets
The extent to which deferred tax assets can be recognised is based on an assessment of the probability that future taxable
income will be available against which the deductible temporary differences and tax loss carry-forwards can be utilised. In
addition, significant judgement is required in assessing the impact of any legal or economic limits or uncertainties in various tax
jurisdictions (see Notes 25.B. and 25.C.).
Estimation uncertainty
•
Impairment of non-financial assets
In assessing impairment of non-financial assets (primarily, internally developed intangible assets – see Note 9), management
estimates the recoverable amount of each asset or cash generating units based on expected future cash flows and uses
an interest rate to discount them. Estimation uncertainty relates to assumptions about future operating results and the
determination of a suitable discount rate.
•
Useful lives of depreciable assets
Management reviews its estimate of the useful lives of depreciable assets (including capitalized development expenses recognised
as an intangible asset) at each reporting date, based on the expected utility of the assets. Uncertainties in these estimates relate
to technological obsolescence that may change the utility of certain intangible assets (see Notes 8 and 9).
•
Fair value measurement of employees’ options and warrants valuation
Management uses valuation techniques to determine the fair value of financial instruments (such as employees’ options and
warrants) and non-financial assets. This involves developing estimates and assumptions consistent with how market participants
would price the instrument. Management bases its assumptions on observable data as far as possible but this is not always
available. In that case management uses the best information available. Estimated fair values may vary from the actual prices that
would be achieved in an arm’s length transaction at the reporting date (see Notes 12 and 17).
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
45
NOTE 4 – CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
In Sterling
In U.S. Dollar
In Euro
In New Israeli Shekel
US dollars
31 December
2018
23,717
212,209
12,260
225,629
473,815
2017
403,307
3,301,745
16,626
159,428
3,881,106
NOTE 5 – OTHER SHORT-TERM FINANCIAL ASSETS
As at 31 December 2018, this consisted of one short term 12 month deposit of $8,000,000 earning an annual interest rate of
2.48%.
As at 31 December 2017, this consisted of two short term 12 month deposits of $9,000,000 and of $2,000,000 earning annual
interest rates of 1.75% and 1.04% respectively.
NOTE 6 – TRADE RECEIVABLES
Trade and other receivables consist of the following:
Trade receivables
Unbilled revenue
Less: provision for expected credit losses
Total receivables
US dollars
31 December
2018
633,366
83,719
(75,000)
642,085
2017
372,536
180,114
(38,685)
513,965
All amounts are short-term. The net carrying value of these receivables is considered a reasonable approximation of fair value. All
of the Company’s trade and other receivables have been reviewed for indicators of impairment.
NOTE 7 – OTHER CURRENT ASSETS
Other current assets consist of the following:
Prepaid Expenses
Deposits to suppliers
Government institutions
Grant receivable
Total other current assets
US dollars
31 December
2018
206,513
19,512
83,329
99,896
409,250
2017
108,733
1,731
28,363
299,438
438,265
Annual Report and Financial Statements for the year ended 31 December 2018 46
46
Notes to the Financial Statements
For the year ended 31 December 2018
NOTE 8 – PROPERTY AND EQUIPMENT
Details of the Company’s property and equipment are as follows:
US dollars
Testing
equipment
Computers
Furniture and
equipment
Gross carrying amount
Balance 1 January 2018
Additions
Balance 31 December 2018
Depreciation
Balance 1 January 2018
Depreciation
Balance 31 December 2018
Carrying amount 31 December 2018
33,445
35,378
68,823
213,244
442,712
655,712
(22,881)
(8,063)
(108,052)
(68,928)
(30,944)
(176,980)
37,879
478,732
US dollars
Gross carrying amount
Balance 1 January 2017
Additions
Disposals
Balance 31 December 2017
Depreciation
Balance 1 January 2017
Depreciation
Disposals
Balance 31 December 2017
Testing
equipment
Computers
Furniture and
equipment
33,445
–
–
104,794
108,450
–
33,445
213,244
(17,678)
(5,203)
–
(97,191)
(10,861)
–
43,124
4,525
–
47,649
(16,924)
(3,929)
–
(22,881)
(108,052)
(20,853)
Carrying amount 31 December 2017
10,564
105,192
26,796
47,649
26,635
74,284
(20,853)
(5,669)
(26,522)
47,762
Vehicles
47,743
–
(47,743)
Leasehold
improve-
ments
Total
13,448
46,654
60,102
307,786
551,135
858,921
(160)
(18,258)
(151,946)
(100,918)
(18,418)
(252,864)
41,684
606,057
Leasehold
improve-
ments
Total
–
13,448
–
229,106
126,423
(47,743)
–
13,448
307,786
(27,374)
(18)
27,392
–
–
–
(160)
–
(160)
(159,167)
(20,171)
27,392
(151,946)
13,288
155,840
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
47
NOTE 9 – INTANGIBLE ASSET
Details of the Company’s intangible asset is as follows:
Gross carrying amount
Balance 1 January 2018
Additions*
Balance 31 December 2018
Amortisation
Balance 1 January 2018
Amortisation
Balance 31 December 2018
Carrying amount 31 December 2018
(*) The additions include $186,403 of share based compensation.
Gross carrying amount
Balance 1 January 2017
Additions (*)
Deduction of government grant
Balance 31 December 2017
Amortisation
Balance 1 January 2017
Amortisation
Balance 31 December 2017
Carrying amount 31 December 2017
(*) The additions include $117,542 of share based compensation.
US dollars
Total
3,325,568
4,021,986
7,347,554
155,015
322,724
477,739
6,869,815
US dollars
Total
1,344,849
2,076,539
(95,820)
3,325,568
38,951
116,064
155,015
3,170,553
As described in Note 2.I. applicable development costs are capitalised and are amortised over the period of expected benefit
from such costs, which is estimated at ten years.
Annual Report and Financial Statements for the year ended 31 December 2018 48
48
Notes to the Financial Statements
For the year ended 31 December 2018
NOTE 10 – SHORT- TERM BORROWINGS
Borrowings include the following financial liabilities:
Bank borrowings (2)
Total short- term borrowings
Annual %
Interest
rate(1)
2018
4.2%
US dollars
31 December
2018
133,497
133,497
2017
–
–
(1) The loans bore variable interest of 4.2%. The above interest rate is the weighted average rate as of 31 December 2018. The loan was fully
repaid in January 2019.
(2) The Company has an unused credit facility of 500,000 NIS (approx. $133,000).
NOTE 11 – OTHER CURRENT LIABILITIES
Other short-term liabilities consist of:
Salaries, wages and related costs
Provision for vacation
Current portion of IIA royalty liability (see Note 13)
Accrued expenses and other
Deferred revenue (*)
Related parties (see Note 29.A.)
Total other short-term liabilities
(*) - These deferred revenues will be recognized over 12 months starting from August 2019.
NOTE 12 – SHAREHOLDERS LOANS
Short-term liabilities to shareholders consist of:
Warrants liability, at fair value
US dollars
31 December
2018
295,790
131,148
10,757
235,965
40,000
371,068
1,084,728
2017
195,269
111,630
20,120
203,610
–
401,142
931,771
US dollars
31 December
2018
–
2017
15,770
The CEO lent funds to the Company to finance the Company’s working capital. The loan bore 6% interest until January 2017
and thereafter increased to 8%. The loan was fully repaid in 2017.
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
49
In November 2016, some of the shareholders advanced to the Company short-term loans totaling $270,000 to finance the costs
of admission to the AIM exchange (“Admission”). Upon the Admission, the Company repaid $297,000 to these shareholders
in full repayment of their short-term loans. In addition, upon the Admission on 29 June 2017, each of these above-mentioned
shareholders were granted twelve month warrants to purchase $270,000 of ordinary shares with an exercise price equaling
the price that shares were issued to the public in connection with the admission, being GBP 1.40. The warrants represented
an embedded derivative (equity kicker) since the economic characteristics and risks of such an equity-based return were
not closely related to the economic characteristics of the host shareholders loan. Accordingly, upon receipt of the loan, the
Company recognised the warrants as a derivative liability at its fair value using the following assumptions: The probability of the
admission was determined by management as a likelihood of 90%, volatility of 41.3%, expected term of one year, interest rate
of 0.79% and accordingly was valued at $43,300. The remaining consideration received by the Company was allocated to the
shareholder loan (the host) as of 31 December 2016. The initial fair value of the warrants was valued at $43,300 and was shown
as a separate short-term derivative liability. The balance of these shareholder loans accordingly was initially recorded at the
amortised value of $226,700 (net of the discount of $43,300). The difference between the amount recorded and the amount
that was expected to be repaid to the shareholders was recorded in profit and loss over the expected period of the loan. As at 31
December 2017, the warrants had less than 6 months until expiry and as the share price was also lower than the exercise price
of the warrants, the warrant liability was valued at a lower value, being approximately $15,800. Concurrent with the expiration
of the warrants in 2018, the warrant liability was terminated. The decrease in 2017 and 2018 in the fair value of this warrant
liability was recorded in profit and loss as part of finance income and expenses.
NOTE 13 – IIA ROYALTY LIABILITY
As described in Note 2.J., the Company received research and development grants from the Israel Innovation Authority (“IIA”)
of approximately $3,050,000 and undertook to pay royalties of approximately 3.5% of revenues derived from research and
development projects that were financed by these grants up to 100% of the amounts received. As at 31 December 2018, the
Company has repaid approximately $500,000 of these grants, in the form of royalties. The maximum amount of royalties that
would be payable, if the Company had unlimited revenue attracting royalty obligations, would be approximately $2,700,000 as
at 31 December 2018.
NOTE 14 – LONG-TERM BORROWINGS
Long-term liabilities consist of:
Bank borrowings
Total long-term borrowings
(1) Variable interest based on the prime interest rate.
Annual %
Interest
rate(1)
2018
4.60%
US dollars
31 December
2018
–
–
2017
7,522
7,522
Annual Report and Financial Statements for the year ended 31 December 2018 50
50
Notes to the Financial Statements
For the year ended 31 December 2018
NOTE 15 – COMMITMENTS AND CONTINGENT LIABILITIES
A.
During the years 2005 through 2012, the Company received grants from the IIA (Israel Innovation Authority) totaling
approximately $3 million, to support the Company’s various research and development programs. The Company is required
to pay royalties to the IIA at a rate of 3.5%, of the Company revenue up to an amount equal to the grants received, plus
interest from the date of the grant. The total amount including interest is approximately $2.7 million. Such contingent
obligation has no expiration date. See Note 13 for more details.
B.
I n January 2009, the Company signed a one year lease agreement for the usage of 470 sq. m. as its primary offices, in the
Industrial area of Lod, Israel. The lease was renewed for short periods and in November 2011, the lease was extended until
March 2016 at which time it was renewed for an additional year at a monthly commitment of approximately $6,800. In
March 2017, the lease was again renewed for another 12 months at the same monthly commitment.
As of December 2017, the Company committed to a three year lease agreement and moved its primary offices to another
location in the Industrial area of Lod, Israel. At the termination of the lease, the Company has an option to renew it
for a further two years. In addition the Company signed two other one year lease agreements for a total of 26 parking
bays, with an option to extend them for another year. The approximate Company commitments regarding these leases
(denominated in New Israeli Shekels) are:
2019
2020
2021
2022
NIS
543,000
552,000
562,000
515,000
USD
145,000
147,000
150,000
137,000
C.
Effective September 2016, the Company signed a marketing consultancy agreement for the sale of its products in North
America. The monthly fee of $5,000 is in addition to a commission payable to the consultant for revenues generated
through the consultant. The commissions start at 20% of revenues up until annual revenues of $1 million and thereafter
the commission rate reduces to 6% and then once $4.3 million of annual revenues have been reached the rate reduces
to 2%. The consultant also received 200,000 share options vesting over 4 years and exercisable at $2.00 per option (see
Note 17). The agreement was terminated during 2018 and 150,000 of the share options were cancelled as they had not
yet vested. The consultant was paid approx. $91,000 during 2018 consisting of the monthly fee and commissions. The
Company has an obligation to pay commissions to the consultant on the relevant revenues earned until 30 June 2019.
Ethernity Networks
Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
51
NOTE 16 – EQUITY
Details regarding share capital and number of shares at 31 December 2018 and at 31 December 2017 are:
Share capital
Ordinary shares of NIS 0.001 par value
Total share capital
Number of shares at 31 December 2018:
Preferred shares of NIS 0.001 par value
Ordinary shares of NIS 0.001 par value
Number of shares at 31 December 2017:
Preferred shares of NIS 0.001 par value
Ordinary shares of NIS 0.001 par value
US dollars
31 December
2018
8,039
8,039
2017
8,028
8,028
Authorized
9,719,300
40,280,700
50,000,000
Authorized
9,719,300
40,280,700
50,000,000
Issued and
paid–in
–
32,518,186
32,518,186
Issued and
paid–in
–
32,556,686
32,556,686
In the first half of 2017, prior to the IPO, the Company effected a 10:1 share split of all its authorized and issued, ordinary
and preferred shares. The par value of the Company’s shares reduced from NIS 0.01 to NIS 0.001. In addition, the number of
all options and warrants granted prior to the share split, increased tenfold and the exercise price reduced by 90%. All share
amounts in these financial statements have been adjusted to reflect this 10:1 share split.
B. Description of the rights attached to the Ordinary Shares
All ordinary shares have equal rights including voting rights, rights to dividends and to distributions upon liquidation. They confer
their holder the rights to receive notices, attend and vote at general meetings.
C. Other components of equity include the following:
–
–
Share premium includes any premiums received on the issue of share capital Including costs in respect of share-based
payments to consultants for the issuance of equity instruments. Any transaction costs associated with the issuance of
shares are deducted from the share premium, net of any related income tax benefit.
Capital reserve includes the value of equity-settled share and option based payments provided to employees,
consultants and third parties.
Annual Report and Financial Statements for the year ended 31 December 2018
52
52
Notes to the Financial Statements
For the year ended 31 December 2018
D. Description of the rights attached to the Preferred Shares
During 2005, 2006 and 2012, the Company issued Series A Preferred Shares of NIS 0.01 par value to strategic shareholders. The
issue price of the preferred shares is $3.29 per share. Prior to conversion of the preferred shares into ordinary shares upon the
consummation of the IPO in June 2017, the rights of the preferred shares were:
Dividend preference
Preferred shares carry a dividend preference up to $3.29 per share. After this amount per preferred share has been distributed,
the dividend preference ceases and the preferred shares will participate pro rata with the ordinary shares in receipt of any
additional dividends on an as-converted basis. The $3.29 per preferred share distributed will be paid out 80% to the preferred
shareholders and 20% to the Company founders. The dividend preference may be waived in whole or part by a majority of the
preferred shareholders together with the mutual consent of the two founders.
Conversion into ordinary shares
the preferred shareholders had the right to convert their shares at any time into fully paid ordinary shares on a 1 for 1 basis.
The preferred shares automatically converted into ordinary shares upon the consummation of the IPO. If prior to the IPO, the
Company issued shares at a price below $3.29, then the preferred shares could have been convertible at a greater than a 1 for 1
basis according to the anti-dilutive formula described in the Articles of Association.
Voting rights
The preferred shares may generally vote together with the ordinary shares of the Company (and not as a separate class) in all
shareholders meetings, with each preferred share having the number of votes as if then converted into ordinary shares (“on an
as-converted basis”).
Liquidation rights
Preferred shares carried a liquidation preference up to $3.29 per share upon actual liquidation or upon an M&A transaction.
After this amount per preferred share has been paid, the liquidation preference was cancelled and the preferred shares would
participate in the balance of the liquidation distributions, pro rata with the ordinary shares on an as-converted basis. The $3.29
per preferred share distributed would be paid out 80% to the preferred shareholders and 20% to the Company founders. This
liquidation preference may be waived in whole or part by a majority of the preferred shareholders together with the mutual
consent of the two founders. All such deemed liquidation events were subject to the approval of the Board of Directors of the
Company.
E.
IPO - Admission to the AIM exchange in London
On 29 June 2017 the Company completed an IPO together with being admitted to trading on the AIM Stock Exchange and
issued 10,714,286 ordinary shares at a price of GBP 1.40 per share, for a total consideration of approximately $19,444,000
(GBP 15,000,000) before underwriting and issuance expenses. Total net proceeds from the issuance amounted to approximately
$17,800,000. Concurrent with the IPO, all the preferred shares were mandatorily converted into ordinary shares on a 1:1 basis,
as mentioned in Note 16.D. The Company trades on the AIM Stock Exchange under the symbol “ENET”.
Immediately after the IPO the Company issued certain prior shareholders, one year warrants to purchase up to 148,778 shares of
the Company at an exercise price of GBP 1.40 (see Note 12). These warrants expired in June 2018. In June 2017, the Company
also issued five-year options to the IPO broker to purchase up to 162,591 shares of the Company at an exercise price of GBP
1.40 (see Note 17.D.)
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
53
NOTE 17 – SHARE-BASED COMPENSATION
A.
In 2013 the Company’s Board of Directors approved a share option plan for the grant of options without consideration,
to employees, consultants, service providers, officers and directors of the Company. The options are exercisable into
the Company’s ordinary shares of NIS 0.01 par value. The exercise price and vesting period (generally four years) for
each grantee of options, is determined by the Company’s Board of Directors and specified in such grantee’s option
agreement. In accordance with Section 102 of the Israel tax code, the Israeli resident grantees’ options, are held by a
trustee. The options are not cashless (they need to be paid for) and expire upon the expiration date determined by the
Board of Directors (generally ten years from the date of the grant). The expiration date may be brought forward, upon
the termination of grantee’s employment or services to the Company. Options do not vest after the termination of
employment or services to the Company. Options are not entitled to dividends.
The following table summarises the salient details and values regarding the options granted (all amounts are in US Dollars unless
otherwise indicated):
Number of options granted
Recipients of the options
Approximate fair value at grant date:
Total benefit
Per option benefit
Assumptions used in computing value:
Risk-free interest rate
Dividend yield
Expected volatility
Expected term (in years)
Expensed amount recorded for year ended:
31 December 2017
31 December 2018
Capitalised amount recorded for year ended:
31 December 2017
31 December 2018
5 Mar
2017
109,000
employee
102,369
0.94
2.50%
0.00%
46%
10
44,105
32,130
Option grant dates
15 Mar
2017
40,000
employee
24,690
0.62
2.50%
0.00%
46%
10
–
–
9 Jul
2017
210,000
employee
335,982
1.60
2.39%
0.00%
40%
10
–
–
10 Jul
2017
30,000
employee
42,637
1.42
2.38%
0.00%
40%
10
–
–
–
–
10,285
7,919
84,360
134,449
10,645
17,091
Annual Report and Financial Statements for the year ended 31 December 2018 54
54
Notes to the Financial Statements
For the year ended 31 December 2018
Number of options granted
Recipients of the options
Approximate fair value at grant date:
Total benefit
Per option benefit
Assumptions used in computing value:
Risk-free interest rate
Dividend yield
Expected volatility
Expected term (in years)
Expensed amount recorded for year ended:
31 December 2017
31 December 2018
Capitalised amount recorded for year ended:
31 December 2017
31 December 2018
Option grant dates
6 Sep
2017
30,000
employee
24 Sep
2017
30,000
employee
17 Jul
2018
17 Jul
2018
160,000
employees
280,000
consultants
40,957
1.37
2.07%
0.00%
40%
10
–
–
6,831
18,045
38,389
1.28
2.26%
0.00%
40%
10
–
–
5,422
4,175
16,632
29,106
2.85%
0.00%
40%
10
–
1,515
–
4,463
2.85%
0.00%
40%
10
–
11,075
–
–
The value of these options at 31 December 2018 which have yet to be recorded as expenses, amount to $212,163.
B.
The following table presents a summary of the status of the option grants by the Company as of 31 December, 2018 and
2017:
Year ended 31 December 2018
Balance outstanding at beginning of year
Granted
Exercised
Forfeited
Balance outstanding at end of the year
Balance exercisable at the end of the year
Weighted
average
exercise
price (US$)
0.30
1.32
0.10
0.16
0.42
Number
3,155,920
460,000
(38,500)
(431,500)
3,145,920
2,349,670
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
55
Year ended 31 December 2017
Balance outstanding at beginning of year
Granted
Exercised
Forfeited
Balance outstanding at end of the year
Balance exercisable at the end of the year
Number
2,626,920
529,000
–
–
3,155,920
2,375,420
C.
The following table summarises information about options outstanding at 31 December 2018:
Exercise
price
$0.10
$0.20
£1.05
£1.05
£1.43
£1.40
£1.40
£1.00
Outstanding at
31 December
2018
2,236,920
129,000
40,000
210,000
30,000
30,000
30,000
440,000
3,145,920
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price (US$)
4.9
8.2
8.2
8.5
8.5
8.7
8.7
9.6
0.10
0.20
1.28
1.36
1.84
1.83
1.89
1.32
Exercisable at
31 December
2018
2,202,420
37,250
10,000
52,500
7,500
7,500
7,500
25,000
2,349,670
The following table summarises information about options outstanding at 31 December 2017:
Weighted
average
exercise
price (US$)
0.11
1.27
–
–
0.30
Weighted
average
remaining
contractual
life (years)
4.8
8.2
8.2
8.5
8.5
8.7
8.7
9.6
Exercise
price
$0.10
$0.20
£1.05
£1.05
£1.43
£1.41
£1.40
£1.40
Outstanding at
31 December
2017
2,406,920
329,000
40,000
210,000
30,000
80,000
30,000
30,000
3,155,920
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price (US$)
Exercisable at
31 December
2017
Weighted
average
remaining
contractual
life (years)
5.7
9.2
9.2
9.5
9.5
9.6
9.7
9.7
0.10
0.20
1.28
1.36
1.84
1.84
1.83
1.89
2,320,420
55,000
–
–
–
–
–
–
2,375,420
5.6
9.2
–
–
–
–
–
–
The fair value of options granted to employees was determined at of the date of each grant. The fair value of the options
granted are expensed in the profit and loss, except for those allocated to capitalised research and development costs.
Annual Report and Financial Statements for the year ended 31 December 2018 56
56
Notes to the Financial Statements
For the year ended 31 December 2018
D. Options issued to the IPO broker
Upon the IPO consummation (see Note 16.E.) the Company issued five-year options to the IPO broker to purchase up to 162,591
shares of the Company at an exercise price of GBP 1.40. These options were valued at approximately $121,000 with the Black
Scholes option model, using the assumptions of a risk-free rate of 1.82% and volatility of 46%. The options may only be
exercised after 28 June 2018. As described in Note 2.U., costs incurred in raising equity finance is applied as a reduction from
those equity sale proceeds and is recorded in Other Components of Equity.
NOTE 18 – REVENUE
Sales
Royalties
Total revenue
NOTE 19 – RESEARCH AND DEVELOPMENT EXPENSES
Employee remuneration, related costs and subcontractors
Maintenance of software and computers
Insurance and other expenses
Amortisation
Total research and development expenses
NOTE 20 – GENERAL AND ADMINISTRATIVE EXPENSES
Employee remuneration and related costs (*)
Professional fees
Rentals and maintenance
Depreciation
Travel expenses
Impairment losses on receivables
Total general and administrative expenses
* Including share based compensation of
US dollars
Year ended
31 December
2018
805,647
318,060
1,123,707
2017
1,236,335
282,326
1,518,661
US dollars
Year ended
31 December
2018
122,004
13,145
15,616
322,724
473,489
2017
44,126
24,983
30,605
116,064
215,778
US dollars
Year ended
31 December
2018
339,566
505,540
342,185
100,918
2,966
132,799
1,423,974
33,540
2017
113,440
251,848
166,087
20,153
3,117
37,258
591,903
44,314
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
57
NOTE 21 – MARKETING EXPENSES
Employee remuneration and related costs (*)
Marketing expenses
Travel expenses
Total marketing expenses
* Including share based compensation of
US dollars
Year ended
31 December
2018
545,129
1,139,669
120,088
1,804,886
(28,509)
2017
158,429
320,252
77,907
556,588
24,864
NOTE 22 – OTHER INCOME
As described in Note 2.J, when the grant is related to an expense item, it is recognised as other income.
NOTE 23 – FINANCING COSTS
Bank fees and interest
Interest and revaluation of embedded derivative on shareholder loans
Total financing costs
NOTE 24 – FINANCING INCOME
Interest and revaluation of embedded derivative on shareholder loans
Interest received
Exchange rate differences
Total financing income
US dollars
Year ended
31 December
2018
15,450
–
15,450
2017
54,264
31,463
85,727
US dollars
Year ended
31 December
2018
20,417
197,949
35,626
253,992
2017
–
69,472
23,507
92,979
Annual Report and Financial Statements for the year ended 31 December 2018 58
58
Notes to the Financial Statements
For the year ended 31 December 2018
NOTE 25 – TAX BENEFIT
A.
The Company is assessed for income tax in Israel - its country of incorporation. The Israeli corporate tax rates for the
relevant years are:
2015
2016
2017
2018
2019
%
26.5
25.0
24.0
23.0
23.0
B.
As of 31 December 2018, the Company has carry-forward losses for Israeli income tax purposes of approximately
$5 million. According to the revised management’s estimation of the Company’s future taxable profits, management
continues to consider it possible that future taxable profits would be available against the tax losses.
C.
Deferred taxes
US dollars
Year ended 31 December
Origination
and reversal
of temporary
differences
186,772
186,772
186,772
Utilisation of
previously
recognised tax
loss
carry–forwards
613,228
613,228
613,228
Total
Deferred tax
expense
800,000
800,000
800,000
Balance at 1 January 2017
Balance at 31 December 2017
Balance at 31 December 2018
D.
Theoretical tax reconciliation
For the years ended 31 December 2018 and 2017, the following table reconciles the statutory income tax rate to the effective
income tax rate:
Tax expense (benefit) at statutory rate
Tax expense (benefit) at statutory rate
Increase in taxes from permanent differences in share-based compensation
Loss carryforwards - not affecting the deferred tax asset
Income tax expense (benefit)
US dollars
Year ended
31 December
2018
23%
(585,853)
44,030
541,824
0
2017
24%
(38,273)
44,814
(83,087)
0
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
59
NOTE 26 – BASIC AND DILUTED (LOSS) / EARNINGS PER ORDINARY SHARE
A.
The earnings and the weighted average number of shares used in computing basic (loss) / earnings per ordinary share, are
as follows:
Profit (loss) for the year
Less: Profit attributed to preferred shares
Profit (loss) for the year attributable to ordinary shareholders
US dollars
Year ended
31 December
2018
(2,547,189)
–
(2,547,189)
2017
159,471
10,702
148,769
Number of shares
Year ended
31 December
2018
2017
Weighted average number of ordinary shares used in the computation of basic (loss) /
earnings per ordinary share
32,526,149
25,397,245
B.
The earnings and the weighted average number of shares used in computing diluted (loss) / earnings per ordinary share,
are as follows:
Profit (loss) for the year
Less: Profit attributed to preferred shares
Profit (loss) for the year attributable to ordinary shareholders
Weighted average number of ordinary shares
Weighted average number of free shares from share options
Weighted average number of ordinary shares used in the computation of diluted (loss) /
earnings per ordinary share
US dollars
Year ended
31 December
2018
(2,547,189)
–
(2,547,189)
2017
159,471
10,702
148,769
Number of shares
Year ended
31 December
2018
32,526,149
1,734,348
2017
25,397,245
2,581,852
34,260,497
27,979,097
Annual Report and Financial Statements for the year ended 31 December 2018 60
60
Notes to the Financial Statements
For the year ended 31 December 2018
NOTE 27 – FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
A.
Financial risk management risk
The activity of the Company exposes it to a variety of financial risks and market risks. The Company re-assesses the financial risks
in each period and makes appropriate decisions regarding such risks. The risks are managed by Company Management which
identifies, assesses and hedges against the risks.
•
Exposure to changes in exchange rates
The Company is exposed to risks relating to changes in the exchange rate of the NIS and other currencies versus the U.S. dollar
(which constitutes the Company’s functional currency). Most of the revenues of the Company are expected to be denominated
in US dollars, while the substantial majority of its expenses are in shekels (mainly payroll expenses). Therefore a change in the
exchange rates may have an impact on the results of operations of the Company.
Currency basis of monetary balances
Assets
Cash and cash equivalents
Other short-term financial assets
Trade receivables
Other current assets
Liabilities
Short term borrowings
Trade payables
Other liabilities
NIS
GBP
US dollars
31 December 2018
Euro
US $
Total
225,629
–
43,085
267,405
536,119
133,497
198,416
823,971
1,155,884
(619,765)
23,717
–
–
39,002
62,719
–
3,517
–
3,517
59,202
12,260
–
–
–
12,260
–
–
–
–
212,209
8,083,709
599,000
102,843
8,997,761
–
86,375
260,757
347,132
12,260
8,650,629
473,815
8,083,709
642,085
409,250
9,608,859
133,497
288,308
1,084,728
1,506,533
8,102,326
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
61
Assets
Cash and cash equivalents
Other short-term financial assets
Trade receivables
Other current assets
Liabilities
Trade payables
Other liabilities
Warrants liability, at fair value
Long term borrowings
NIS
GBP
US dollars
31 December 2017
Euro
US $
Total
159,428
–
85,114
1,731
246,273
212,789
911,651
–
7,522
1,131,962
(885,689)
403,307
–
–
–
403,307
16,626
–
32,606
299,438
348,670
3,301,745
11,069,472
396,245
–
14,767,462
3,881,106
11,069,472
513,965
301,169
15,765,712
–
–
–
–
–
–
–
–
–
–
12,298
20,120
15,770
–
48,188
225,087
931,771
15,770
7,522
1,180,150
403,307
348,670
14,719,274
14,585,562
•
Sensitivity to changes in exchange rates of the NIS and other currencies to the US dollar
A change in the exchange rate of the NIS and other currencies to the USD as of the dates of the relevant statement of financial
position, at the rates set out below, which according to Management are reasonably possible, would increase (decrease) the
profit and loss by the amounts set out below. The analysis below was performed under the assumption that the rest of the
variables remained unchanged.
US dollars
Sensitivity to changes in exchange rates
of the non US dollar currencies to the US dollar
Effect on profit (loss) /equity (before
tax) from the changes caused by
the market factor
Effect on profit (loss) /equity (before
tax) from the changes caused by
the market factor
Book value
Increase at the rate of
31 December
Decrease at the rate of
10%
(26,161)
(4,309)
(30,641)
13,350
20,193
82,397
54,829
5%
(13,080)
(2,154)
(15,320)
6,675
10,097
41,199
27,417
2018
261,606
43,085
306,407
(133,497)
(201,933)
(823,971)
(548,303)
5%
13,080
2,154
15,320
(6,675)
(10,097)
(41,199)
(27,417)
10%
26,161
4,309
30,641
(13,350)
(20,193)
(82,397)
(54,829)
Cash and cash equivalents
Trade receivables
Other current assets
Short Term Borrowings
Trade payables
Other liabilities
Total
Annual Report and Financial Statements for the year ended 31 December 2018 62
62
Notes to the Financial Statements
For the year ended 31 December 2018
US dollars
Sensitivity to changes in exchange rates
of the non US dollar currencies to the US dollar
Effect on profit (loss)/equity (before
tax) from the changes caused by
the market factor
Effect on profit (loss)/equity (before
tax) from the changes caused by
the market factor
Book value
Cash and cash equivalents
Trade receivables
Other current assets
Short Term Borrowings
Trade payables
Other liabilities
Total
•
Credit risk
10%
(57,936)
(11,772)
(30,117)
21,279
91,165
752
13,371
Increase at the rate of
31 December
5%
2017
(28,968)
(5,886)
(15,058)
10,639
45,583
376
579,361
117,720
301,169
(212,789)
(911,651)
(7,522)
Decrease at the rate of
5%
10%
28,968
5,886
15,058
(10,639)
(45,583)
(376)
57,936
11,772
30,117
(21,279)
(91,165)
(752)
6,686
(133,712)
(6,686)
(13,371)
All of the cash and cash equivalents and other short-term financial assets as of 31 December, 2018 and 2017 were deposited
with one of the major banks in Israel.
Trade receivables as of 31 December, 2018 and 2017 were from customers in Israel, the U.S., Asia and countries of the European
Union, including a few major customers. The Company performs ongoing reviews of the credit granted to customers and the
possibility of loss therefrom and includes an adequate allowance for impairment losses.
•
Liquidity risk
The Company financed its activities from its operations, Shareholders’ loans and short and long-term borrowings from the bank.
Subsequent to the IPO, the Company has large cash resources to finance and expand its operations. All the non-current liabilities
at 31 December 2017 were repaid in 2018. The short-term borrowings at 31 December 2018 were repaid in 2019 and the trade
payables and other current liabilities are expected to be paid within 1 year.
Fair value of financial instruments
B.
General
The financial instruments of the Company include mainly trade receivables and debit balances, credit from banking institutions
and others, trade payables and credit balances, IIA liability, warrant liability at fair value and balances from transactions with
shareholders.
The principal methods and assumptions used in calculating the estimated fair value of the financial instruments are as follows
(fair value for disclosure purposes):
Financial instruments included in current asset items
These instruments (trade receivables and debit balances) are of a current nature and, therefore, the balances as of 31 December,
2018 and 2017, approximate their fair value.
Financial instruments included in current liability items
These instruments (credit from banking institutions and others, trade payables and credit balances, suppliers and service
providers and balances from transactions with shareholders) - in view of the current nature of such instruments, the balances as
of 31 December, 2018 and 2017 approximate their fair value.
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
63
C. Capital management
The objectives of the Company’s policy are to maintain its ability to continue operating as a going concern with a goal of
providing the shareholders with a return on their investment and to maintain a beneficial equity structure with a goal of reducing
the costs of capital. The Company may take different steps toward the goal of preserving or adapting its equity structure,
including a return of equity to the shareholders and/or the issuance of new shares for purposes of paying debts and for purposes
of continuing the research and development activity conducted by the Company. For the purpose of the Company’s capital
management, capital includes the issued capital, preference shares, share premium and all other equity reserves attributable to
the equity holders of the Company.
D. Trade Receivables
IFRS 9 provides a simplified model of recognising lifetime expected credit losses for all trade receivables as these items do not
have a significant financing component.
Management have assessed the receivables on a case by case basis. Management have concluded based on past experience that
there is any risk in these receivables being collected. Management have indicated a concern of the payment from one customer
of which a provision has been made for. This is not expected with the remaining receivables and therefore no further assessment
is required.
NOTE 28 – SEGMENT REPORTING
The Company has implemented the principles of IFRS 8 (‘Operating Segments’), in respect of reporting segmented activities. In
terms of IFRS 8, the management has determined that the Company has a single area of business, being the development and
delivery of high end network processing technology.
The Company’s revenues from customers are divided into the following geographical areas:
Asia
Europe
Israel
United States
Asia
Europe
Israel
United States
US dollars
Year ended
31 December
2018
203,000
117,888
324,220
478,600
2017
66,439
580,772
397,464
473,986
1,123,708
1,518,661
%
Year ended
31 December
2018
18.1%
10.5%
28.9%
42.6%
2017
4.4%
38.2%
26.2%
31.2%
100.0%
100.0%
Revenue from customers in the Company’s domicile, Israel, as well as its major market, the Unites States, Asia and Europe, have
been identified on the basis of the customer’s geographical locations.
Annual Report and Financial Statements for the year ended 31 December 2018 64
64
Notes to the Financial Statements
For the year ended 31 December 2018
The Company’s revenues from major customers as a percentage of total revenue was:
Customer A
Customer B
Customer C
Customer D
Customer E
NOTE 29 – RELATED PARTIES
A. Founders
%
Year ended
31 December
2018
28%
22%
18%
11%
10%
89%
2017
22%
19%
12%
10%
9%
72%
In accordance with the employment agreements of the two founders of the Company, Mr. David Levi and Mr. Baruch Shavit,
both were entitled to an annual bonus of 5% of the Company’s revenue for the years 2012-2015, if the Company had positive
cash flow from operations. This was in addition to their salaries and share based compensation.
The two founders of the Company were together entitled to 20% of the dividend preference payable to preferred shareholders,
as described in Note 16.D above.
In April 2017, the employment agreement of the two founders of the Company was amended, in terms of which each of them
is entitled to a performance bonus of 5% of the Company’s annual profit before tax. For each year. the bonus shall be capped at
$250,000 each.
B. Chief Financial Officer
In March 2017 the Company appointed Mark Reichenberg as CFO of the Company at 35% of a full time basis, at a monthly cost
to the Company of approximately $4,750. Upon admission to AIM, his time commitment and salary doubled. Either side may
terminate the employment upon 6 months notice. Mr. Reichenberg also received 109,000 ESOP options, vesting over four years,
exercisable at $0.20 per option and with an expiration date in March 2027. Mr. Reichenberg was appointed as a director on
29 June 2017.
C. Directors’ remuneration for the year ended 31 December 2018
In terms of Israeli Companies Law, the following needs to be disclosed
Name
Graham Woolfman (1)(3)
David Levi
Mark Reichenberg (1)
Shavit Baruch
Neil Rafferty (1) (3)
Chen Saft-Feiglin (2) (3)
Zohar Yinon (2) (3)
Position
Non Executive Chairman
Chief Executive Officer
Chief Financial Officer
VP Research & Development
Non Executive Director
Non Executive Director
Non Executive Director
US dollars
Salary and
benefits
Share based
compensation
50,030
206,340
109,442
206,340
40,024
17,517
19,185
648,878
–
–
32,130
–
–
–
–
32,130
Total
50,030
206,340
141,572
206,340
40,024
17,517
19,185
681,008
Ethernity Networks Notes to the Financial Statements
For the year ended 31 December 2018
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
65
Directors’ remuneration for the year ended 31 December 2017
Name
US dollars
Position
Salary and
benefits
Annual bonus
Share based
compensation
Graham Woolfman (1)(3)
David Levi
Mark Reichenberg (1)
Shavit Baruch
Neil Rafferty (1) (3)
Chen Saft-Feiglin (2) (3)
Zohar Yinon (2) (3)
Non Executive Chairman
Chief Executive Officer
Chief Financial Officer
VP Research & Development
Non Executive Director
Non Executive Director
Non Executive Director
20,109
224,840
80,879
224,843
16,088
2,597
2,820
572,176
–
8,860
–
8,860
–
–
–
17,720
–
–
44,105
–
–
–
–
44,105
Total
20,109
233,700
124,984
233,703
16,088
2,597
2,820
634,001
(1) Appointed 29 June 2017.
(2) Appointed 15 November 2017.
(3) Independent director.
Directors’ equity interests in the Company as at 31 December 2018
Name
Graham Woolfman
David Levi
Shavit Baruch
Mark Reichenberg (1)
Neil Rafferty
Chen Saft-Feiglin
Zohar Yinon
Shares
Options
Direct
holdings
Beneficial
holdings
Total shares
held
Unexercised
vested
options
Unvested
options Total options
–
6,767,900
4,500,000
–
7,143
–
–
10,715
–
–
–
–
–
–
10,715
6,767,900
4,500,000
–
7,143
–
–
–
60,710
60,710
27,250
–
–
–
11,275,043
10,715
11,285,758
148,670
–
–
–
81,750
–
–
–
81,750
–
60,710
60,710
109,000
–
–
–
230,420
D. Directors’ equity interests in the Company as at 31 December 2017
Name
Graham Woolfman
David Levi
Shavit Baruch
Mark Reichenberg (1)
Neil Rafferty
Chen Saft-Feiglin
Zohar Yinon
Shares
Options
Direct
holdings
Beneficial
holdings
Total shares
held
Unexercised
vested
options
Unvested
options Total options
–
6,767,900
4,500,000
–
7,143
–
–
10,715
–
–
–
–
–
–
10,715
6,767,900
4,500,000
–
7,143
–
–
–
60,710
60,710
–
–
–
–
11,275,043
10,715
11,285,758
121,420
–
–
–
109,000
–
–
–
109,000
–
60,710
60,710
109,000
–
–
–
230,420
(1) 27,250 of the unvested options vested on 5 March 2018
Annual Report and Financial Statements for the year ended 31 December 2018 66
66
Notes to the Financial Statements
For the year ended 31 December 2018
NOTE 30 – RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES
1 January 2018
Cashflow
– Repayments
– Proceeds
31 December 2018
Long Term
Borrowings
Short Term
Borrowings
Total
(7,522)
–
–
–
133,497
133,497
(7,522)
133,497
133,497
Ethernity Networks Registered Office:
13A Hamelacha Street
Lod Industrial Park
7152025
Israel