Building Innovative Programmable Networking Solutions Annual Report and Financial Statements For the Year Ended 31 December 2023 Ethernity Networks Ltd Company registration number: 51-347834-7. 01 Contents • • • • • • • • • • • • • • Statutory and Other Information Chairman’s Statement Chief Executive’s Statement Financial Review Board of Directors Corporate Governance Statement Directors’ Report Statement of Directors’ Responsibilities Independent Auditor’s Report to the Shareholders of Ethernity Networks Ltd. Statement of Financial Position Statement of Comprehensive Loss Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements 02 03 04 06 11 13 18 19 20 23 24 25 26 28 Israel, Ethernity Networks Ethernity Networks, headquartered in (AIM: ENET.L OTCMKTS: ENETF) provides innovative, comprehensive networking and security solutions on programmable increase that telco/cloud hardware network capacity. infrastructure Ethernity’s semiconductor logic offers data processing functionality for different innovative applications, networking patented wireless access technology, and fibre access media controllers, all equipped with control software with a rich set of networking features. Ethernity’s solutions quickly adapt to customers’ changing needs, improving time-to-market, and the deployment of 5G over wireless and fibre infrastructure. facilitating The Company’s core technology enables the delivery of data offload functionality at the pace of software development, improves performance, and reduces capital expenses, power consumption the latency, which and deployment of network function virtualisation for 5G, Broadband, and Edge Computing. facilitates Annual Report and Financial Statements for the year ended 31 December 2023 02 Statutory and Other Information Directors Secretary Registered office Auditor Registrars Nominated Adviser and Joint Broker Joint Broker Joint Broker UK Solicitors Israel Solicitors 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** Joseph (Yosi) Albagli David Levi Ayala Deutsch Shavit Baruch Richard Bennett Aviva Banczewski Julie Kunstler *Appointed 14 February 2024 **Appointed 16 April 2024 Ayala Deutsch Beit Golan, 3rd Floor 1 Golan St., Corner HaNegev Airport City 7019900 Israel Fahn Kanne & Co. Grant Thornton Israel 32 Hamasger Street Tel Aviv 6721118 Israel Link Group 10th Floor, Central Square 29 Wellington Street Leeds LS1 4DL Allenby Capital Limited 5 St Helen’s Place London EC3A 6AB CMC Markets UK plc 133 Houndsditch London EC3A 7BX Peterhouse Capital Limited 80 Cheapside London EC3A 6AB Edwin Coe LLP 2 Stone Buildings Lincoln’s Inn London WC2A 3TH Gornitzky & Co HaHarash St 20 Tel Aviv-Yafo 6761310 Israel Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 03 Chairman’s Statement I am pleased to present my report as Chairman of the Board. The year 2023 commenced with several unfortunate events and challenges, yet following strategic measures taken by the Board and Management, the year concluded with notable improved results and growth. Outlook Since the the beginning of 2024, Company appointed a highly experienced and knowledgeable VP Marketing and a talented and professional new CFO. In addition, two External Directors have joined the board, bringing deep know-how in finance, marketing, and strategy. several implement The Chinese PON contract which failed to deliver the expected results, together with a slow market in the first half of the year, necessitated the Board and Management to restructuring measures, including a meaningful cut of expenses and reduction of headcount, together with adopting an improved business model. Consequently, during the second half of the year several major, high margin contracts were signed resulting in revenue growth and improved cash flow. robust technology and With a IP foundation, a diverse portfolio of products and services, an efficient R&D structure, and recent additions of professional talent, the Company is now better positioned than ever to face the future and capitalize on the growing market opportunities. Yosi Albagli Chairman 19 April 2024 Annual Report and Financial Statements for the year ended 31 December 2023 04 Chief Executive’s Statement In 2023, we achieved significant growth in revenue and gross margin, with a major turnaround in the second half. This success came despite facing headwinds from the global economic climate and a disappointing performance in the Chinese PON market. We delivered 29% revenue growth and a 46% improvement in gross profit. To further strengthen our position, we streamlined our R&D efforts to optimize resource allocation and accelerate the completion of our Universal Edge Platform (UEP) platform. We also optimized our workforce to enhance efficiency and position the Company for positive cash flow in 2024. The Ethernity UEP extends its capabilities beyond Carrier Ethernet by incorporating industry-leading Remote OLT (GPON and XGS-PON) functionality for the PON market. This versatile platform delivers a comprehensive feature set, including MEF-compliant Carrier Ethernet, precise timing synchronization, Link Bonding, and advanced PON capabilities. This unified solution empowers OEM customers to address a broad range of markets and applications while significantly reducing integration efforts. Furthermore, the UEP’s FPGA-based architecture provides Ethernity with the flexibility to adapt its capabilities to meet the ever-evolving needs of the market. This To capitalize on our strengths, we strategically focused on two key areas. First, we leveraged our core competence in Carrier Ethernet, where we have a proven track record of supporting OEM partners in deploying over one million products globally. established leadership position gives us a strong foundation for further growth. Second, we are actively pursuing opportunities in the high-growth PON market, particularly in North America. The US government’s BEAD initiative, allocating $42 billion to bridge the digital divide by deploying and expanding broadband specifically in underserved areas, presents a significant opportunity for us to contribute our expertise and expand our market share. The Ethernity UEP is a powerful platform that combines an FPGA with our ENET flow processor and a comprehensive suite of application software. This innovative solution delivers MEF-compliant Carrier Ethernet functionality, along with precise timing synchronization and Link Bonding capabilities. Throughout the second half of 2023 and the first quarter of 2024, the UEP underwent rigorous testing by two new OEM vendors. We are working with these vendors with the target of them launching solutions based on our technology. to committed Throughout the past year, the Company remained delivering comprehensive solutions, encompassing both software and hardware. Notably, we placed a strong emphasis on mobile backhaul products that integrate our patented wireless link bonding technology. Additionally, we’ve made significant progress on our ENET 5200 FPGA System- on-Chip (SoC) as well as Quad XGS-PON OLT and GPON OLT MAC capabilities and is now available for customer adoption. We are pleased to report continued revenue growth in 2023 from our U.S. fixed wireless broadband solution customer. Furthermore, we are actively engaged in the development of a second- generation product for this customer. This development effort is ongoing in 2024, and we have been advised that the customer anticipates placing new orders for both the first and second generation products throughout the second half of 2024. The customer’s rollout ramp-up plan for the second-generation product is scheduled to take place during 2025. We ended 2023 with two significant contract wins from existing customers: • Tier-1 U.S. Aerospace and Defence Company: Following government approval, this longstanding customer signed a $475,000 contract extension to leverage Ethernity’s technology on a critical military project. We are committed to supporting them throughout 2024 with ongoing paid maintenance and support. • Long-Term Networking Customer: We secured a substantial $800,000 contract with a customer who has been a loyal partner since 2008. They initially adopted our Carrier Ethernet technology and have since deployed hundreds of thousands of Ethernity- inside products, generating tens of millions in annual revenue for the customer. Both Ethernity and the customer are actively exploring new market opportunities to expand our collaboration. Ethernity Networks stands out for its cost- effective routing data plane functionality on FPGAs, enabling a versatile solution that supports services from 1Gbps to 100Gbps. This translates to significant advantages for our customers. They can leverage the base data processing engine to offer Carrier Ethernet services at a competitive price point, with the option to unlock premium features by enabling the routing application. Furthermore, for high-volume applications, Ethernity offers a seamless migration path to eASIC or ASICs, ensuring dramatic cost reductions as customer needs evolve. Ethernity Networks offers a compelling value proposition for OEM customers by combining the power of our cost- (DPU) effective Data Processing Unit SoC with our innovative low-latency PON technology. This comprehensive suite provides a versatile umbrella of wired, fiber, and wireless access solutions. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 05 Fueled by market growth: • Surging Bandwidth Demands: for The ever-increasing demand bandwidth, driven by cloud services and artificial the network edge, creates a significant opportunity for Ethernity’s solutions. intelligence at • IP-Based Network Expansion: The growth of IP-based next-generation networks is a key market driver for our high-performance offerings. • Fiber Access Boom: The widespread deployment of fiber optics and the dominance of PON technology for fiber access perfectly align with Ethernity’s strengths. • Rise of Edge Computing: The growing adoption of edge computing deployments creates a strong demand for our low-latency solutions. • 5G Expansion: The global rollout of 5G networks fuels the need for innovative wireless backhaul solutions, a core competency of Ethernity. • Carrier Ethernet Adoption: The adoption of Carrier increasing Ethernet for wireless backhaul applications presents a significant growth opportunity. Outlook While 2023 presented its share of challenges, Ethernity successfully finalised its UEP as a complete system product. This marks a significant step forward, enabling us to evolve beyond offering just FPGA SoCs and provide comprehensive solutions which all integrate ENET implementation of FPGA SoC, hardware and software application. This shift empowers our customers to achieve faster time-to-market and accelerate revenue generation. Previously, deploying products based on our FPGA SoCs typically took 18 months. With the UEP all integrated system, the time to revenue or deployment from sign-off can be dramatically reduced to just six months. efficiency positions This Ethernity to capitalize on planned customer wins and drive near-term growth. enhanced solutions, the need transitioning By to a system-based approach, Ethernity unlocks significant value for a broader customer base. Our comprehensive combining powerful FPGA SoCs with Ethernity’s semiconductor expertise and application software, eliminate for in-house product development by our customers. This empowers companies without extensive engineering resources to leverage our technology and quickly launch their own solutions. This strategic shift positions Ethernity to strengthen its market position, expand its OEM customer base, and attract new partners who can significantly contribute to our revenue growth. Based on the scopes of work being discussed with potential new customers, Ethernity expects to secure new contracts for our Carrier Ethernet and PON technology, generating approximately $2.2 - $3 million in incremental non- recurring engineering revenue in 2024 on top of our established business. This momentum positions us for significant future growth as our OEM partners leverage our solutions to win market share and generate revenue for themselves. We anticipate this will translate into substantial new revenue opportunities for Ethernity in 2025. (NRE) David Levi Chief Executive Officer 19 April 2024 Annual Report and Financial Statements for the year ended 31 December 2023 06 Financial Review Financial Performance I am pleased to present my first Annual Report as CFO of the Company. Since assuming the CFO duties in August 2023, it has been a period of both excitement and challenge for the Company from a financial standpoint. On the one hand, we achieved substantial growth in every financial metric; and on the other hand, we encountered significant cashflow and legal challenges. I am pleased to present that despite these obstacles, we succeeded to conclude the 2023 fiscal year with exceptionally robust financial results. Highlights and achievements: • FY 2023 revenue of $3.8 million represents 29% growth vs. 2022 revenues (2022: $2.9 million). • FY 2023 cash collections from customers amounted to $4.9 million. • Gross profit increased by 46% to $2.3 million (2022: $1.6 million). • Operating loss decreased from $8.7 million in 2022 to $5.3 million in 2023 reflecting a decrease of 27%. • EBITDA loss decreased by 47% to $3.9 million (2022: $7.3 million). • EBITDA loss for H2 2023 decreased by 74% to $0.8 million from $3.1 million in H1 2023. • Net cash funds raised during the year amounted to $3.6 million. • Cash at 31 December 2023 of $2 million (31 December 2022: $0.7 million) Key financial results EBITDA Although EBITDA is not a recognised reportable accounting measure, it provides a meaningful insight into the operations of the Company when removing the non-cash or intangible asset elements from trading results along with recognising actual costs versus various IFRS adjustments, in this case being the amortisation and non-cash items charged in operating income and the effects of IFRS 16 treatment of operating leases. The EBITDA for the financial year ended 31 December 2023 is as follows: EBITDA Revenues Gross Profit Gross Margin % Operating loss Adjusted for: US Dollar For the year ended 31 December 2023 3,777,919 2,340,142 61.9% 2022 2,937,424 1,598,328 54.4% Increase (Decrease) 840,495 741,814 (5,280,652) (8,696,876) (2,369,401) % 29% 46% 7.5 ppts 27% Amortisation of intangible assets Depreciation charges on fixed assets Depreciation in respect of IFRS16 lease assets 961,380 138,782 315,884 961,380 108,673 339,561 – 30,109 (23,677) EBITDA (3,864,606) (7,287,262) 3,422,656 (47%) Add back share based compensation charges Add back vacation accrual charges Add back impairments Adjust IFRS16 rent expense reversals Adjusted EBITDA 72,287 (109,026) 220,220 (398,033) 221,362 35,646 599,200 (378,128) (149,075) (144,672) (378,980) (19,905) (4,079,158) (6,809,182) 2,730,024 (40%) Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 07 The EBITDA losses decreased during the 2023 year by 47% from $7.3 million in 2022 to $3.9 million in 2023. The decrease is attributed to the significant growth in revenues as well as the cost savings which have been implemented across the board in the various operating department expenses. The adjusted EBITDA measure which adds back various non-cash items improved by 40% in comparison to the previous year from an adjusted EBITDA loss of $6.8 million in 2022 to $4.1 million in 2023. When comparing the EBITDA figures of the first six months of 2023 with those of the latter half of 2023, notable growth is evident in the second half of 2023, as detailed below: EBITDA Revenues Gross Profit Gross Margin % Operating loss Adjusted for: US Dollar For the six months ended 31-Dec-23 2,379,048 1,537,648 64.6% 30-Jun-23 1,398,871 802,494 57.4% Increase (Decrease) 980,177 735,154 (1,506,397) (3,774,255) 2,267,858 % 70% 92% 7.2 ppts (60%) Amortisation of intangible assets Depreciation charges on fixed assets Depreciation in respect of IFRS16 lease assets 480,690 71,168 157,942 480,690 67,614 157,942 – 3,554 – EBITDA (796,597) (3,068,009) 2,271,412 (74%) Add back share based compensation charges Add back vacation accrual charges Add back impairments Adjust IFRS16 rent expense reversals Adjusted EBITDA Summarised trading results Summarised Trading Results Revenues Gross Profit Gross Margin % Operating Loss Financing costs Financing income 16,262 (86,702) 26,683 (193,767) 56,025 (22,324) 193,537 (204,266) (39,763) (64,378) (166,854) 10,499 (1,034,121) (3,045,037) 2,010,916 (66%) US Dollar For the year ended 31 December 2023 3,777,919 2,340,142 61.9% (5,280,652) (1,267,906) Increase (Decrease) 840,495 741,814 2022 2,937,424 1,598,328 54.4% (8,696,876) 3,416,224 (573,388) (694,518) 183,811 1,267,652 (1,083,841) % 29% 46% 7.5 ppts (39%) 121% (85%) (20%) (58%) Net comprehensive loss for the year (6,364,747) (8,002,612) 1,637,865 Basic and Diluted earnings per ordinary share (0.04) (0.11) 0.06 Weighted average number of ordinary shares for basic earnings per share 143,876,859 76,013,296 Annual Report and Financial Statements for the year ended 31 December 2023 08 Financial Review Revenue Analysis Revenues for the twelve months ended 31 December 2023 increased by 29% to $3.8 million (2022: $2.9 million). The revenue mix will continue to evolve as the Company progresses in achieving the desired mix of the revenue streams from the sale of products and solutions in addition to software revenue and NRE from IP licenses and services. Margins The gross margin percentage increased to 61.9% in 2023 from 54.4 % in 2022 reflecting an increase of 7.5 percentage points which is mainly attributed to the increased licensing revenues which carry a 100% profit margin. Operating Costs and Research & Development Costs After adjusting for the amortisation of the capitalised Research and Development Costs, Depreciation, IFRS Share Based Compensation and payroll non-cash accruals adjustments, the resultant increases (decreases) in Operating costs, as adjusted would have been: US Dollar For the year ended 31 December Operating Costs Total R&D Expenses R&D Intangible amortisation Vacation accrual reversals (expenses) Share Based Compensation IFRS adjustment Research and Development Costs net of amortisation, Share Based Compensation, IFRS adjustments and Vacation accruals Total G&A Expenses Share Based Compensation IFRS adjustment Vacation accrual reversals (expenses) Impairment losses of financial assets Fixed Assets Depreciation Expense Depreciation in respect of IFRS16 General and Administrative expenses, net of depreciation, Share Based Compensation, IFRS adjustments, Vacation accruals and impairments. Total Sales and Marketing Expenses Share Based Compensation IFRS adjustment Vacation accrual reversals (expenses) Sales and Marketing expenses, net of Share Based Compensation and Vacation accruals. Total 2023 5,160,697 (961,380) 57,569 (58,755) 4,198,131 1,841,842 (17,710) 21,196 (220,220) (138,782) (315,884) 1,170,442 621,052 4,178 30,261 655,491 6,024,064 2022 6,618,795 (961,380) (21,700) (160,134) 5,475,581 2,523,916 (51,627) (3,189) (599,200) (108,673) (339,561) 1,421,666 1,167,534 (9,601) (10,757) Increase (Decrease) (1,458,098) – 79,269 101,379 (1,277,450) (682,074) 33,917 24,385 378,980 (30,109) 23,677 (251,224) (546,482) 13,779 41,018 1,147,176 8,044,423 (491,685) (2,020,359) % (22%) (23%) (27%) (18%) (47%) (43%) (25%) Research and Development costs after reducing the costs for the amortisation of the capitalised Research and Development intangible asset, share based compensation and add back for vacation accrual adjustment have decreased by 23% from $5.5 million in 2022 to $4.2 million in 2023. This is mainly attributed to the headcount cost savings announced during 2023. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 09 A further decrease of 18% is noted in the General and Administrative costs over 2022 to $1.2 million after adjusting for depreciation, share based compensation, IFRS adjustments, impairments and vacation accrual adjustments. This decrease as well is attributable to the headcount cost savings as well as further administrative cost savings. Similar decrease in the Sales and Marketing costs during the 2023 financial year due to cessation of many marketing travel and travel related activities resulted in a decrease of 43% of the Sales and Marketing costs net of the non-cash item adjustments of IFRS share based compensation adjustment as well as the vacation accrual adjustment from $1.1 million in 2022 to $655K in 2023. Recognition of Research and Development Costs In line with the change in policy adopted by the Company from 1 July 2019 the Company continues to no longer recognise the Research and Development costs as an intangible asset and is recognising them as an expense being charged against income in the year incurred. For the years ending 31 December 2021 and 2022 management performed their own internal assessment of the fair value of the intangible asset and concluded that the value of the asset is fair and no impairment of the intangible asset on the balance sheet is required. This process was repeated by management for the financial year under review, the year ended 31 December 2023, and the assertion that the underlying value of the intangible asset exceeds the carrying value on the balance sheet remains unchanged. Balance Sheet The Company presents a stronger cash position for 31 December 2023 as a result of the cash collections from customers for the year which amounted to $4.9 million. In addition, the Company completed three placings during the year which resulted in net cash inflows amounting to $3.6 million. Furthermore, there have been other changes on balance sheet items as follows: • Reduction in trade receivables due to the successful collection of outstanding debts from 2022. • • Inventories reduced as the Company no longer stocks up on high-cost inventory following the ease of the global components’ shortage and reduction in the inventory lead-times. Intangible asset on the balance sheet continues to reduce in carrying value due to the annual amortisation with an approximate 4.5 years of amortisation remaining. The current carrying value of $4.5 million is a result of the Company historically adopting the provisions of IAS38 relating to the recognition of Development Expenses, which methodology as noted in the 2019 Annual Report has ceased from 1 July 2019. • Operating lease right of use asset and the lease liability – in October 2021 the Company committed to a five-year agreement for its primary offices in Airport City Israel. At the termination of the lease, the Company has an option to renew it for a further five years. As at 31 December 2022 such renewal option was considered as reasonably certain to be exercised according to IFRS16. As at 31 December 2023, the Company’s assessment was that such the option for the five year extension may not be exercised due to the decline in rental prices within the premises market. In light of the reassessment, the lease asset as well as the lease liability have been adjusted to reflect the current state of the Company’s asset and commitment given the end of lease in November 2026. Under the signed contract, the remaining liability as at 31 December 2023 is $1.1 million. • Trade payables and other liabilities increased in light of the signing of the settlement plan following the Company’s exit of the Temporary Suspension of Proceedings (“TSP”). According to the settlement plan, the Company will repay in full all debts outstanding as of 16 October 2023 (date at which the Company entered into the TSP) in quarterly instalments in the order of the debts’ seniority and in compliance with the settlement plan. To date, the Company has fully repaid its guaranteed debts and has partially paid the priority creditors. Annual Report and Financial Statements for the year ended 31 December 2023 10 Financial Review Summary of fundraising transactions, related liabilities and finance expense in respect of fundraising transactions. During the twelve-month period ended on 31 December 2023, the Company has completed the following placing deals: • January 2023 – Gross proceeds of £1.65 million (approximately $2 million) • May 2023 – Gross proceeds of £780K (approximately $980K) • December 2023 – Gross proceeds of £700K (approximately $880K) At the year end, the Company holds zero liability in respect of the share subscription agreement first announced in February 2022 with 5G Innovation Leaders Fund LLC. In accordance with IFRS, the Company recognised a net finance expense of $975K as a result of adjusting the fair value of the shares allotted to 5G Innovation Leaders Fund LLC as part of the liability exhaustion. The Company holds a liability for the outstanding warrants it has issued as part of the January 2023 placing amounting to $2,841. Going Concern In the presentation of the annual financial statements for the year ended 31 December 2023, the Company makes reference to going concern within the audit report. Reference to this is further made in Note 2 to the Annual Financial Statements presented herein. Ayala Deutsch Chief Financial Officer 19 April 2024 Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 11 Board of Directors Joseph (Yosi) Albagli (Non-Executive Chairman) Yosi was formally appointed as the Independent Non-executive Director and Chairman on 10 March 2021. Yosi comes from an engineering background, and has over 30 years of experience in engineering, business strategy, management, and entrepreneurship in the communications high-tech industry. Yosi co-founded and served as President and CEO of Tdsoft Ltd in 1994, driving the company toward becoming the leader in V5 solutions. In 2005, he led a reverse merger with VocalTec (NASDAQ: VOCL) becoming President, CEO and a board member, growing the company’s market share, and establishing it as a leader in Voice-over-IP technology. Yosi also served as President and CEO of CTWARE Ltd., as a board member of ITGI Medical (TASE), and as President of the Satellite Communications division for Orbit Communication Systems (TLV: ORBI). Yosi is currently serving as the Co-Founder and Chairman of Over-Sat Ltd, a satellite communications company and as CTO of Cassiopeia Space Systems Inc. Yosi is a Cum Laude graduate of The Technion – Israel Institute of Technology with a BSc degree in Civil Engineering, a graduate of Computer science of the Tel Aviv University and a veteran of the Israeli navy, in which he taught electronics. David Levi (Chief Executive Officer) David has over 28 years in the telecom industry, with vast technical and business experience in ATM, voice, TDM, SONET/SDH, Ethernet and PON. Prior to founding Ethernity, David was the founder of Broadlight, a semiconductor company that developed BPON and GPON components and was acquired by Broadcom (BRCM) for $230 million. David invented the GPON protocol with two US patents registered in his name. Prior to this, David worked as Director of Product Marketing at ECI Telecom in the Broadband Access division, and Senior Product Line Manager at RAD, responsible for $50 million product line sales, a product manager at Tadiran Communication, sales manager at Dynamode Ltd. David holds an BSc Degree in Electronic Engineering from The Jerusalem College of Technology and an MBA from Bar Ilan University, and is a veteran officer (Major) of the Israeli Defense Forces, in which he served as a Systems Engineer and project manager. Ayala Deutsch, CPA (Chief Financial Officer) (Appointed 14 February 2024) Ayala joined Ethernity in January 2019 as Director of Finance and then VP Finance and has more than 15 years of financial experience in international high-tech companies. Served previously as Corporate Controller at Glide, and prior to that, as auditor at KPMG. On August 1, 2023, following termination of employment of Mark Reichenberg (previous CFO and board member) Ayala took over the CFO duties and attended the board meetings as an observer and on 14 February 2024 Ayala was officially appointed as CFO and board member. Her duties include financial management, risk management, maintenance of internal controls, governance, special projects, and corporate transactions. Ayala is a Certified Public Accountant in Israel and obtained her MBA, majoring in Financial Management at the Hebrew University in Jerusalem. Shavit Baruch (VP Research and Development) Shavit has over 28 years of experience in the telecom and datacom industry, with vast technical experience in ATM, Ethernet and SONET/SDH, both at the components and system level. Prior to Ethernity Networks, Shavit served as Chief Architect at Native Networks, a start-up company developing products for the Metro Ethernet market. Prior to this, in 2002, Shavit established Crescendo Networks, a start-up company enhancing data center applications performance. Prior to the venture at Crescendo, Shavit served as R&D Director at ECI Telecom, where he was in charge of the development of all transmission cards for one of the world’s most successful broadband systems. Earlier, Shavit worked at Lannet Data Communication, acquired by AVAYA, designing, together with Galileo, Ethernet Switch on Silicon. Shavit holds an MSc. Degree in Electronic Engineering from Tel-Aviv University and is a veteran officer (Major) of the Israeli Defense Forces, in which he developed Electronic Systems. Richard Bennett (Independent Non-Executive Director) Richard Bennett has extensive business and listed company experience over a career spanning 30 years. During that time, he has worked for General Electric in Asia and the US and co-founded and listed on NASDAQ J2Global, an internet telecoms business currently valued at US$3.5 billion. He has worked in executive, chairman and non-executive roles with a series of successful growth- focused technology and clean energy companies, currently including AIM-quoted GETECH plc, Hong Kong-quoted China New Energy Ltd and previously AIM-quoted wireless technology company, MTI Wireless Edge. Annual Report and Financial Statements for the year ended 31 December 2023 12 Board of Directors Aviva Baczewski (External Independent Non-Executive Director) (Appointed 16 April 2024) Aviva Banczewski has over 30 years of varied finance experience including audit, consulting, regulatory and compliance, business and strategic planning and acquisition due diligence assignments. She started her career working for Andersen in both Australia and then Israel for a total of 15 years. Since then, she has held both finance and investor relations roles in publicly traded companies, including ICL Group Ltd and Evogene Ltd, which are both listed on Nasdaq and the Tel Aviv Stock Exchange (“TASE”). She currently acts as Director of Investor Relations for Pluri, Inc, a Nasdaq and TASE listed company. Aviva has also been a board member of the Israel Australia Chamber of Commerce since November 2022. Julie Kunstler (External Independent Non-Executive Director) (Appointed 16 April 2024) Julie Kunstler has over 30 years’ experience in the communications components, equipment, and software industry, having served as an executive, venture-fund investor, analyst, and board member. Most recently, Julie held the position of Chief Analyst - Broadband Access Intelligence Service for Omdia (a division of Informa Tech), covering the fixed broadband access industry ecosystem. Prior to joining Omdia, Julie served as VP Business Development for Teknovus, a venture-backed broadband access PON (Passive Optical Network) chip start-up, where she assisted with fundraising, corporate strategy, OEM agreements, and its acquisition by Broadcom. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 13 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 2018 Quoted Companies Alliance Corporate Governance Code (the “the Code”). The QCA Code was developed by the QCA’s Corporate Governance Expert Group and a standalone Working Group comprising leading individuals from across the small & mid-size quoted company ecosystem. As a company incorporated in Israel the Company also complies with the corporate governance provisions of Israel’s Companies Law, 5759-1999 (the “Companies Law”) as may be applicable, the more relevant of which relates to the constitution of the Board of Directors, the Audit and Risk Committee and the Remuneration Committee. Whilst the Israeli Law requirements are more onerous, these have been incorporated into the requirements and guidance under the QCA Code. 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 ten 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 ten principles and to publish certain related disclosures on its website and in its Annual Report. The Company addresses the key governance principles defined in the QCA Code as outlined on the Company website. Further details of the Company’s approach to the 10 principles of the Code and how it applies these principles, which is updated at least annually as required, with the most recent Company update being 5 December 2023, can be found on the Company`s Website section for Investors at https://ethernitynet.com/investors/#1454056723887-bab53599-82b7 The Directors and the Board The Board is currently comprised of three executive directors, David Levi, Ayala Deutsch and Shavit Baruch, and four non-executive directors, Joseph (Yosi) Albagli (Chairman), Richard Bennett, Aviva Banczewski, and Julie Kunstler. The balance between executive and non-executive directors encourages a diversity of views, and ensures the independence of the directors, not allowing any group to dominate the Board’s decision making. In accordance with Israel Companies Law, the Board must always have at least two external directors who meet certain statutory requirements of independence (the “External Directors”). The Company’s External Directors are currently Aviva Banczewski and Julie Kunstler. The two external directors were appointed on 16 April 2024 and they have been appointed to replace Chen Saft-Feiglin and Zohar Yinon who have stepped down as the Company’s external directors following the conclusion of their terms in office on 14 November 2023. The term of office of an External Director is three years, which can be extended for two additional three-year terms. Under the Companies Law, External Directors are elected by shareholders by a special majority and may be removed from office only in limited cases. Any committee of the Board must include at least one External Director and the Audit and Risk Committee and Remuneration Committee must each include all of the External Directors (including one External Director serving as the chair of the Audit and Risk Committee and Remuneration Committee), and a majority of the members of each of the Audit and Risk Committee and Remuneration Committee must comply with the director independence requirements prescribed by the Companies Law. Annual Report and Financial Statements for the year ended 31 December 2023 14 Corporate Governance Statement The detailed composition of the board is as follows: Joseph (Yosi) Albagli David Levi Ayala Deutsch* Independent Non-Executive Chairman Chairman of the Nomination Committee (Companies Law precludes the Chairman from being a member of the Audit and Remuneration Committees) Chief Executive Officer Nomination Committee member Chief Financial Officer and Company Secretary (appointed 14 February 2024) Nomination Committee member Shavit Baruch Vice President R&D Richard Bennett Aviva Banczewski** Julie Kunstler** Independent Non-Executive director Audit and Risk Committee member Remuneration Committee member Nomination Committee member External Director (appointed 16 April 2024) Audit and Risk Committee Chair Remuneration Committee member External Director (appointed 16 April 2024) Remuneration Committee Chair Audit and Risk Committee member * Ayala Deutsch was appointed on 14 February 2024 and served as an observer from 1 August 2023 until formal appointment. CFO and Company Secretary between 1 January 2023 and 31 July 2023 was former board member and CFO, Mark Reichenberg. ** Aviva Banczewski and Julie Kunstler were appointed on 16 April 2024. The Company’s external directors between 1 January 2023 and 14 November 2023 were Chen Saft-Feiglin and Zohar Yinon who had stepped down as the Company’s external directors following the conclusion of their terms in office on 14 November 2023. Biographical details of all the Directors are set out on pages 11 to 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, Ayala Deutsch, is responsible for ensuring that the Company complies with the statutory and regulatory requirements and maintains high standards of corporate governance. She supports and works closely with the Chairman of the Board; the Chief Executive Officer and the Board committee chairs in setting agendas for meetings of the Board and its committees and supports the transfer of timely and accurate information flow from and to the Board and the management of the Company. During 2023, the Board met formally on twenty occasions. Board members also hold ad hoc discussions amongst themselves between formal Board meetings to discuss governance, financial, operational, and other business matters. A majority of the Board members constitute the legal quorum for a board meeting. All Directors receive a board pack comprising an agenda and all relevant operational information in advance of each meeting. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 15 Attendance at Board and Committee meetings by members of the Board during the year ended 31 December 2023 was as follows: Number of meetings Yosi Albagli David Levi Mark Reichenberg (Note 1) Ayala Deutsch (as observer) Shavit Baruch Chen Saft-Feiglin (Note 2) Zohar Yinon (Note 2) Richard Bennett Note. 1. Ceased to act as director on 31 July 2023. 2. Ceased to act as directors on 14 November 2023. Board Audit & Risk Committee Remuneration Committee Nominations Committee 20 20 20 10 11 20 20 18 20 4 3 2 2 2 2 4 4 4 3 2 2 1 0 1 3 3 3 1 1 1 0 0 0 0 0 1 Re-election of Directors In accordance with the Company’s Articles the Directors are required to serve for a period of no less than three years from the date of appointment, or in the case of Admission, for 3 years from the date of Admission of the Company to AIM. In terms of the General Meeting of the Company held on 14 August 2023, the term of David Levi and Shavit Baruch, in their capacity as directors, was extended until 22 June 2026. Chen Saft-Feiglin and Zohar Yinon, in their capacity as external directors were reappointed as Directors for a three-year term commencing from 15 November 2020 and ending on 14 November 2023 after which date they did not continue serving as directors. Mark Reichenberg ceased to act as CFO and board member on 31 July 2023. Yosi Albagli was formally appointed as the Independent Non-Executive Chairman on 10 March 2021 for an initial period of three years. On 8 March 2024 the Board re-appointed Yosi as non-executive chairman for an interim period until his compensation and re-appointment for an additional three-year term are approved by the Remuneration Committee which can take place following the appointment of the two new external directors to the Board. The Company will then seek shareholder approval for Yosi’s compensation package as well as ratify his re-appointment to the board at a future general meeting. Richard Bennett was formally appointed as an Independent Non-Executive Director on 7 April 2022 for an initial period of three years and as such only becomes eligible for re-election in 2025. Board Committees The Board has established properly constituted Audit and Risk, Remuneration and Nomination Committees of the Board with formally delegated duties and responsibilities. Audit and Risk Committee The QCA Corporate Governance Code recommends that an Audit and Risk Committee should comprise at least three members who are independent non-executive directors, and that at least one member should have recent and relevant financial experience. The Israel Companies Law requires that at least two the External Directors and one other non-executive director are members of the Committee, and that the Chairman of the Company may not be a member of the Committee. Annual Report and Financial Statements for the year ended 31 December 2023 16 Corporate Governance Statement The Audit and Risk Committee, which comprises the Independent Non-Executive and External Directors (excluding the Chairman) and by permanent invite the CFO. The Committee was chaired by Zohar Yinon during 2023 until he ceased to act as director with the remaining members being Chen Saft-Feiglin and Richard Bennett. The Committee invites other members of the Board as well as the Independent and Internal Auditors of the Company to attend meetings as appropriate. The Audit and Risk Committee has responsibilities which include the review of: • The Company’s internal control environment; • Financial risks and Internal Audit; • Financial statements, reports, and announcements, including the Board’s responsibility to present an annual report that is fair, balanced, and understandable. The Committee evidences this review in a report to the Board following its meeting with the auditors to discuss their Report to the Committee and includes an assessment of the information provided in support of the Board’s statement on going concern and on any significant issues and how those issues were addressed; • Independence of auditors, including a review of the non-audit services provided and the level of such fees relative to the audit fee. In reviewing the Annual Financial Statements, discussions take place with the Auditor`s without executive management present and discussions are also held on the effectiveness of external audit; and • Ensuring the Company has a policy which allows any member of staff to raise, in confidence, any concern about possible impropriety in matters of financial reporting or other matters, and to ensure that suitable arrangements are in place for a proportionate independent investigation of such matters including any follow-up action required. During the year ended 31 December 2023, the Committee met on four occasions and the matters considered included the following: • Consideration of the Company`s annual audited financial statements for the year ended 31 December 2022, review of going concern, treatment of the equity and finance transactions undertaken in the financial statements and recommendation to the Board for publication thereof. • Review of the Interim Unaudited Financial Statements as at 30 June 2023, review of going concern and reporting, treatment of the equity and finance transactions undertaken, and formal recommendation to the Board for the Issuance of the Interim Unaudited Financial Statements as at 30 June 2023. 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) was chaired by Ms. Chen Saft-Feiglin until she ceased to act as director on 14 November 2023, with the remaining members Zohar Yinon and Richard Bennett. The Remuneration Committee has responsibility for reviewing and recommending to the Board the remuneration and incentive arrangements for the executive and non-executive directors, and delegated authorities to the chief executive relating to senior staff. The Remuneration Committee also has responsibility for: • Recommending to the Board the adoption of or variations to a Compensation Policy for Office Holders and monitoring its implementation. • Recommending to the Board any changes to the remuneration and incentive arrangements in accordance with the policy, for each executive and non-executive director (excluding the External directors), and senior executives. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 17 The remuneration of all External Directors is fixed in terms of Israel Companies Law. During the year ended 31 December 2023, the Remuneration Committee met formally on three occasion to finalise for recommendation to the Board of Directors the executive director remuneration and incentive packages and update the Compensation policy for 2023. Furthermore, the Remuneration Committee formally recommended to the board the option grants to employees and executive management pending on exit of the TSP. Nominations Committee The Committee’s responsibilities include ensuring that the size and composition of the Board is appropriate for the needs of the Company including an assessment of the diversity profile, selecting the most suitable candidate or candidates for the Board and to oversee succession planning aspects for the Board. During the year under review, the Committee comprised the Non-Executive Chairman Yosi Albagli, the Chief Executive Officer David Levi, Mark Reichenberg the CFO, until he ceased to act as CFO and board member on 31 July 2023, and as Independent Non-Executive Director, Richard Bennett. During the year ended 31 December 2023, the Nominations Committee met formally on one occasion in order to formalise and recommend the appointment of Ayala Deutsch as CFO and board member of the Company. Other board members participate as required. 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 current forecasts; • Reviews by the Board of year end forecasts; and • The establishment of procedures for capital expenditure and expenditure incurred in the ordinary course of business. The external auditors are engaged to express an opinion on the financial statements. They discuss with management the reporting of operational results and the financial condition of the Company, to the extent necessary to express their audit opinion. Internal Audit The Internal Auditors presented their 2022 review report to the Audit and Risk Committee in March 2023. Their report for the previous year focused on the activity of the R&D Department as was outlined in the Annual Report of 2022. • Review of the business, identify key high risk areas and review controls. • Identify risks. • Assess risks and present findings. • Preparation and agreement of an implementation plan addressing the high risk recommendations. During 2023 the internal audit focused on the Company’s insurance sufficient coverage and will provide its report in due course. Insurance The Company maintains appropriate insurance cover in respect of litigation against the Directors and Officers of the Company. Annual Report and Financial Statements for the year ended 31 December 2023 18 Directors’ Report The Directors present their Annual Report and the audited Financial Statements for the financial year ended 31 December 2023. Principal Activities Ethernity Networks is a technology solutions provider that develops and delivers data processing technology and solutions used in high-end Carrier Ethernet applications across the telecom, mobile, security and data center markets. The Company’s core technology, which is populated on programmable logic, enables delivering data offload functionality at the pace of software development, improves performance and reduces power consumption and latency, therefore facilitating the deployment of virtualisation of networking functionality. The Company is headquartered in Israel. Results and Dividends The Consolidated Statement of Comprehensive Loss for the year is set out on page 24. No dividend is proposed for the year. Risk Management The Company’s policies for managing risk arising from activities are set out in Note 26 of the Financial Statements. Directors The current Directors of the Company are: Joseph Albagli Independent Non-Executive Chairman David Levi Chief Executive Officer Ayala Deutsch Chief Financial Officer* Shavit Baruch VP R&D Richard Bennett Independent Non-Executive Director Aviva Banczewski External Director** Julie Kunstler External Director** * Appointed as CFO and director on 14 February 2024 ** An independent director appointed as an External Director in terms of Israel Companies Law. Appointed on 16 April 2024. Directors of the Company who served during 2023 but ceased to act to date: Mark Reichenberg Chief Financial Officer* Chen Saft-Feiglin External Director** Zohar Yinon External Director** * Ceased to act as director on 31 July 2023. ** An independent director appointed as an External Director in terms of Israel Companies Law. Ceased to act as directors on 14 November 2023. Directors’ Interests The interests of current Directors in shares and options are disclosed in the Directors’ Remuneration Report set out in Note 28C of the financial statements. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 19 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 the Director’s Reports) and the financial statements in accordance with applicable laws and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market (AIM). In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRS as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Website Publication The Directors are responsible for ensuring the Annual Report and the financial statements are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the Israel and the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. Annual Report and Financial Statements for the year ended 31 December 2023 20 Independent Auditor’s Report to the Shareholders of Ethernity Networks Ltd. Fahn Kanne & Co. Head Office 32 Hamasger Street Tel-Aviv 6721118, ISRAEL PO Box 36172, 6136101 T +972 3 7106666 F +972 3 7106660 www.grantthornton.co.il Independent Auditor’s Report to the Shareholders of Ethernity Networks Ltd. Opinion We have audited the financial statements of Ethernity Networks Ltd. (the “Company”), which comprise the Statement of financial position as at 31 December 2023 and the Statement of comprehensive loss, Statement of changes in equity and Statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at 31 December 2023 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Israel, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Material uncertainty related to going concern We draw attention to Note 2 in the financial statements, which indicates that the Company has an accumulated deficit of $42.8 million and during the year ended December 31, 2023, the Company incurred a net comprehensive loss of $6.4 million (2022: $8 million) and negative cash flows from operating activities of $1.5 million (2022: $7.3 million). Note 2 also details that the Company depends on potential growth derived from the indicated growing interest of original equipment manufacturers (OEM) to adopt the Company’s offerings and solutions, as well as on the successful execution of new contracts with new and existing customers, and income from existing contracts, and that the success of the Company’s plans is not assured. As stated in Note 2, these events or conditions, along with other matters as set forth in Note 2, indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 21 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 current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Material uncertainty related to going concern section, we have determined the matters described below to be key audit matters to be communicated in our report. Key audit matter Impairment of intangible assets Description of Key audit matter and why it is a matter of most significance in the audit The intangible assets include development costs that are directly attributable to a project’s development phase. Such intangible assets are required to be tested for impairment when there is any indication of impairment. The impairment of intangible assets involves judgement and significant management therefore we identified the impairment analysis of intangible assets as a significant risk, which was one of the most significant assessed risks of material misstatement due to error. Description of auditor’s response and key observations Our audit work included, but was not restricted to: We assessed the recoverability of intangible assets by testing management’s estimation of the value in use Such assessment included the evaluation of the competence of management in accordance with ISA 500 (Audit Evidence). The assessment also included testing 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 capitalised intangible assets, assessing the reasonableness of key assumptions used, the most recent and updated management expectations and forecasts, valuation model, working capital, useful life and the compliance with the requirements of International Accounting Standard 36 (IAS 36), Impairment of assets. Based on the audit work performed, we have not identified any material misstatement in the impairment of intangible assets. Information other than the financial statements and auditor’s report thereon Management is responsible for the other information. The other information comprises the information included in the annual report other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of management and the board of directors for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs, 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. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Annual Report and Financial Statements for the year ended 31 December 2023 22 Independent Auditor’s Report to the Shareholders of Ethernity Networks Ltd. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance 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 those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period 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, April 19, 2024 Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 23 Statement of Financial Position For the year ended 31 December 2023 ASSETS Current Cash Trade receivables Inventories Other current assets Current assets Non-Current Property and equipment Intangible asset Right-of-use asset Other long term assets Non-current assets Total assets LIABILITIES AND EQUITY Current Short Term Borrowings Trade payables Liability related to share subscription agreement Warrants liability Other current liabilities Current liabilities Non-Current IIA royalty liability Lease liability 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 2023 2022 5 6 7 8 9 10 11 12 15.E.[2] 15.E.[1] 11,13 14 11 15 1,993,808 186,145 535,689 427,875 3,143,517 820,310 4,501,420 1,175,950 35,144 6,532,824 9,676,341 96,306 1,237,113 – 2,841 1,607,897 2,944,157 50,645 764,366 815,011 3,759,168 715,815 1,299,072 773,076 343,872 3,131,835 810,326 5,462,800 2,816,641 35,689 9,125,456 12,257,291 428,935 785,583 1,836,555 – 1,121,909 4,172,982 – 2,505,777 2,505,777 6,678,759 103,417 21,904 47,299,358 40,786,623 1,334,531 1,225,391 (42,820,133) (36,455,386) 5,917,173 5,578,532 9,676,341 12,257,291 Annual Report and Financial Statements for the year ended 31 December 2023 24 Statement of Comprehensive Loss For the year ended 31 December 2023 Revenue Cost of sales Gross margin Research and development expenses General and administrative expenses Marketing expenses Other income Operating loss Financing costs Financing income Loss before tax Tax expense Net comprehensive loss for the year Basic and diluted loss per ordinary share US dollars For the year ended 31 December 2023 3,777,919 1,437,777 2,340,142 5,160,697 1,841,842 621,052 (2,797) (5,280,652) (1,267,906) 183,811 2022 2,937,424 1,339,096 1,598,328 6,618,795 2,523,916 1,167,534 (15,041) (8,696,876) (573,388) 1,267,652 (6,364,747) (8,002,612) – – (6,364,747) (8,002,612) (0.04) (0.11) Notes 17,27 18 19 20 21 22 23 24 25 Weighted average number of ordinary shares for basic loss per share 143,876,859 76,013,296 The accompanying notes are an integral part of the financial statements. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 25 Statement of Changes in Equity For the year ended 31 December 2023 l a t o T y t i u q e l d e t a u m u c c A s t n e n o p m o c e r a h S t i c i f e d y t i u q e f o i m u m e r p 9 3 1 5 5 9 , , 2 1 ) 4 7 7 2 5 4 , , 8 2 ( 9 2 0 , 4 0 0 , 1 4 4 7 , 2 8 3 , 0 4 r e h t O – 2 6 3 1 2 2 , 5 8 4 4 8 3 , 8 5 1 , 0 2 – – – – ) 2 1 6 2 0 0 , , 8 ( ) 2 1 6 , 2 0 0 8 , ( – – – – 2 6 3 , 1 2 2 – – – 6 4 1 , 0 2 – 2 1 3 3 7 , 3 8 3 2 5 7 3 9 5 , 5 9 6 , 2 ] 2 [ . E . 5 1 – – e r a h S l a t i p a C 0 4 1 , 1 2 – – s e r a h s f o r e b m u N 8 3 7 , 1 5 3 , 5 7 s e t o N , 5 5 4 6 3 , 7 8 2 , 2 7 – – – ( 1 9 3 , 5 2 2 , 1 3 2 6 , 6 8 7 , 0 4 4 0 9 , 1 2 7 3 4 , 4 8 0 , 8 7 7 8 2 , 2 7 6 4 6 , 5 6 5 , 3 0 8 5 7 0 8 , , 2 5 7 8 , 7 5 2 – – – – 2 3 5 8 7 5 , , 5 ) 6 8 3 ) 7 4 7 , 4 6 3 , 6 ( ) 7 4 7 , 4 6 3 , 6 ( – – 3 7 1 7 1 9 , , 5 ) 3 3 1 , 0 2 8 2 4 , ( 1 3 5 , 4 3 3 , 1 8 5 3 , 9 9 2 , 7 4 7 1 4 , 3 0 1 1 9 0 , 1 2 7 , 6 7 3 r a e y e h t r o f s s o l e v i s n e h e r p m o c t e N 3 2 0 2 r e b m e c e D 1 3 t a e c n a a B l – 1 4 7 – – 5 0 2 , 0 3 5 , 3 1 4 4 , 5 3 7 9 0 , 8 8 1 , 7 2 1 ] 1 [ . E . 5 1 f o e c n a u s s i e h t o t d e t a c o l l a s d e e c o r p t e N s e r a h s y r a n d r o i 9 4 2 , 2 6 7 , 2 1 3 3 , 5 4 9 3 4 , 3 3 9 , 8 6 1 ] 2 [ . E . 5 1 - p i r c s b u s e r a h s o t t n a u s r u p d e u s s i s e r a h S t n e m e e r g a n o i t 3 5 8 , 6 3 1 8 2 , 0 2 2 8 1 1 , 5 1 5 , 2 ] 3 [ . E . 5 1 s t n a r r a w d n a s e r a h s n i i d a p s e s n e p x E – – 6 0 1 , 7 3 ] 3 [ . E . 5 1 s t n a r r a w d n a s e r a h s n i i d a p s e s n e p x E n o i t a s n e p m o c d e s a b - e r a h s e e y o p m E l 2 2 0 2 y r a u n a J 1 t a e c n a a B l e r a h s o t t n a u s r u p d e u s s i s e r a h S t n e m e e r g a n o i t p i r c s b u s s n o i t p o e e y o p m e l f o e s i c r e x E r a e y e h t r o f s s o l e v i s n e h e r p m o c t e N 2 2 0 2 r e b m e c e D 1 3 t a e c n a a B l n o i t a s n e p m o c d e s a b - e r a h s e e y o p m E l . s t n e m e t a t s l a i c n a n i f e h t f o t r a p l a r g e t n i n a e r a s e t o n g n i y n a p m o c c a e h T Annual Report and Financial Statements for the year ended 31 December 2023 26 Statement of Cash Flows For the year ended 31 December 2023 Operating activities Net comprehensive loss for the year Non-cash adjustments Depreciation of property and equipment Depreciation of right of use asset Share-based compensation Amortisation of intangible assets Amortisation of liabilities Lease liability Interest Foreign exchange losses on cash balances Revaluation of financial instruments, net Expenses paid in shares and options Net changes in working capital Decrease in trade receivables Decrease (Increase) in inventories Increase in other current assets Increase in other long-term assets Increase in trade payables Increase (decrease) in other liabilities Increase in IIA royalty liability Net cash used in operating activities Investing activities Purchase of property and equipment Net cash used by investing activities Financing activities Proceeds from share subscription agreement Proceeds allocated to ordinary shares Proceeds allocated to warrants Issuance costs Proceeds from exercise of warrants and options Proceeds from short term borrowings Repayment of short-term borrowings Repayment of lease liability Net cash provided by financing activities Net change in cash Cash beginning of year Exchange differences on cash Cash end of year US dollars For the year ended 31 December 2023 2022 (6,364,747) (8,002,612) 138,129 315,884 72,287 961,380 (113,078) 200,261 3,377 818,521 257,875 1,112,927 237,387 (84,003) 545 451,530 422,658 73,645 (1,495,422) 108,581 339,561 221,362 961,380 (396,434) 235,204 381,480 (984,001) 20,158 246,526 (488,266) (102,908) 3,267 133,825 (12,261) – (7,335,138) (148,113) (148,113) (258,838) (258,838) – 3,756,391 132,544 (262,444) – 1,239,657 (1,543,210) (398,033) 2,924,905 1,281,370 715,815 (3,377) 1,993,808 2,000,000 – – (9,952) – 527,790 (493,338) (394,053) 1,630,447 (5,963,529) 7,060,824 (381,480) 715,815 Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 27 Supplementary information: Interest paid during the year Interest received during the year Supplementary information on non-cash activities: Shares issued pursuant to share subscription agreement Expenses paid in shares and options Non-cash issuance costs Update of lease liability The accompanying notes are an integral part of the financial statements. US dollars For the year ended 31 December 2023 2022 64,239 226 1,778,468 257,875 26,757 1,324,807 13,321 1,507 384,485 20,158 – – Annual Report and Financial Statements for the year ended 31 December 2023 28 Notes to the Financial Statements NOTE 1 – NATURE OF OPERATIONS AND GENERAL ETHERNITY NETWORKS LTD. (hereinafter: the “Company”), was incorporated in Israel on the 15th of December 2003 as Neracore Ltd. The Company changed its name to ETHERNITY NETWORKS LTD. on the 10th of August 2004. The Company provides innovative, comprehensive networking and security solutions on programmable hardware for accelerating telco/cloud networks performance. Ethernity’s FPGA logic offers complete Carrier Ethernet Switch Router data plane processing and control software with a rich set of networking features, robust security, and a wide range of virtual function accelerations to optimise telecommunications networks. Ethernity’s complete solutions quickly adapt to customers’ changing needs, improving time-to-market and facilitating the deployment of 5G, edge computing, and different NFV appliances including 5G UPF, SD-WAN, vCMTS and vBNG with the current focus on 5G emerging appliances. The Company’s customers are situated worldwide. In June 2017 the Company completed an Initial Public Offering (“IPO”) together with being admitted to trading on the AIM Stock Exchange and issued 10,714,286 ordinary shares at a price of £1.40 per share, for a total consideration of approximately $19,444,000 (£15,000,000) before underwriting and issuance expenses. Total net proceeds from the issuance amounted to approximately $17,800,000. The Company trades on the AIM Stock Exchange under the symbol “ENET”. On 12 October 2023, the Company voluntarily applied to the court in Tel Aviv, Israel for a Temporary Suspension of Proceedings order (“TSP”) and the convening of a meeting of creditors in accordance with the Israeli Insolvency and Economic Rehabilitation Law. This TSP order, which was granted by the court, was requested by the Company to protect the Company’s business, as the Company experienced liquidity issues from the delay in payments from expected debtors. At the time of this application, the Company’s cash balance was approximately $107,000, while the creditors amounts due approximated $1.6 million. The TSP order prevented the creditors of the Company from enforcing any payments due to them. Following an equity raise in December 2023 and the collection of funds from the Company’s debtors, the Company was able to make a settlement proposal, whereby valid creditors at the time of the TSP order, will be repaid in full per the timetable and conditions of the TSP court approved settlement plan over a period of 12 months. Guaranteed and priority creditors would have priority for repayment, followed by general creditors. The creditors approved this proposal which was endorsed by the court on 4 February 2024 and the Company exited the TSP process. To date the Company has fully repaid its guaranteed creditors and partially paid the priority creditors, all in compliance with the settlement plan. Following conclusion of the TSP, and approval of the settlement plan, the Company continues to undertake its business and operations as usual with no restrictions. NOTE 2 – GOING CONCERN As of December 31, 2023 the Company has an accumulated deficit of $42.8 million and during the year ended December 31, 2023, the Company incurred a net comprehensive loss of $6.4 million (2022: $8 million) and negative cash flows from operating activities of $1.5 million (2022: $7.5 million). The financial statements have been prepared assuming that the Company will continue as a going concern. Under this assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future unless management intends or has no realistic alternative other than to liquidate the entity or to stop trading for at least, but not limited to, 12 months from the reporting date. The assessment has been made of the Company’s prospects, considering all available information about the future, which have been included in the financial budget, from managing working capital and among other factors such as debt repayment schedules. Consideration has been given inter alia to the significant values of funds raised ($3.64 million) and cash collections from customers during the year ended 31 December 2023 ($4.9 million). Furthermore, the Company implemented a cost reduction plan during the second half of 2023 and going forward, the results of which are apparent in the 60% reduction of the H2 2023 operating loss (of $1.5 million) compared to the H1 2023 operating loss (of $3.8 million). The Company depends on potential growth derived from the indicated growing interest of original equipment manufacturers (OEM) to adopt the Company’s offerings and solutions, as well as on the successful execution of new contracts with new and existing customers, and income from existing contracts. Considering the outlined factors, including reduction in expenses, and based on experience, the directors have an expectation that the Company will have access to adequate resources to continue in operational existence for the foreseeable future. However, the success of the Company’s plans as outlined above is not assured and thus a material uncertainty exists that may cast a significant doubt on the Company’s ability to continue as a going concern and fulfil its obligations and liabilities in the normal course of business in the future. The financial statements do not include any adjustments relating to recoverability and classification of the recorded asset amounts, and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 29 NOTE 3 – MATERIAL 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 2023, no new standards that had a material effect on these financial statements become effective. A. Basis of presentation of the financial statements and statement of compliance with IFRS These financial statements have been prepared in accordance with International Financial Reporting Standards (hereinafter – “IFRS”), as issued by the International Accounting Standards Board (“IASB”). The financial statements have been prepared on an accrual basis and under the historical cost convention, except for financial instruments measured at fair value through profit and loss. 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 applicable law jurisdiction in which the Company operates is in Israel. The financial statements for the year ended 31 December were approved and authorised for issue by the board of directors on April 18, 2024. B. Use of significant accounting estimates, assumptions, and judgements The preparation of financial statements in conformity with IFRS requires management to make accounting estimates and assessments that involve use of judgment and that affect the amounts of assets and liabilities presented in the financial statements, the disclosure of contingent assets and liabilities at the dates of the financial statements, the amounts of revenues and expenses during the reporting periods and the accounting policies adopted by the Company. Actual results could differ from those estimates. Estimates and judgements are continually evaluated and are based on prior experiences, various facts, external items and reasonable assumptions in accordance with the circumstances related to each assumption. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Regarding significant judgements and estimate uncertainties, see Note 4. Functional and presentation currency C. The Company prepares its financial statements on the basis of the principal currency and economic environment in which it operates (hereinafter - the “functional currency”). The Company’s financial statements are presented in US dollars (“US$”) which constitutes the functional currency of the Company and the presentation currency of the Company. D. Foreign currency transactions and balances Specifically identifiable transactions denominated in foreign currency are recorded upon initial recognition at the exchange rates prevailing on the date of the transaction. Exchange rate differences deriving from the settlement of monetary items, at exchange rates that are different than those used in the initial recording during the period, or than those reported in previous financial statements, are recognised in the statement of comprehensive income in the year of settlement of the monetary item. Other profit or loss items are translated at average exchange rates for the relevant financial year. Assets and liabilities denominated in or linked to foreign currency are presented on the basis of the representative rate of exchange as of the date of the statement of financial position. Exchange rate differentials are recognised in the financial statements when incurred, as part of financing expenses or financing income, as applicable. Annual Report and Financial Statements for the year ended 31 December 2023 30 Notes to the Financial Statements The exchange rates as at the 31st of December, of one unit of foreign currency to each US dollar, were: New Israeli Shekel (“NIS”) Great British Pound (“GBP”) Euro 2023 0.276 1.274 1.106 2022 0.284 1.204 1.066 Inventories E. Inventories are stated at the lower of cost and net realisable value. Cost includes all expenses directly attributable to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity. Costs of ordinarily interchangeable items are assigned using the first in, first out cost formula. Net realisable value is the estimated selling price in the ordinary course of business less any directly attributable selling expenses. Property and equipment F. 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 Furniture and equipment Leasehold improvements % 33 15-33 6-15 Over period of lease Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term (including any extension option held by the Company and intended to be exercised) and the expected life of the improvement. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognised. An asset is derecognised on disposal or when no further economic benefits are expected from its use. G. Research and development expenses Expenditures on the research phase of projects to develop new products and processes are recognised as an expense as incurred. Development activities involve a plan or a design for the production of new or substantially improved products and processes. Development costs that are directly attributable to a project’s development phase are recognised as intangible assets, provided they meet all of the following recognition requirements: • the technical feasibility of completing the intangible asset so that it will be available for use or sale. • intention to complete the intangible asset and use or sell it. • ability to use or sell the intangible asset. • ability to demonstrate how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 31 • the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. • ability to measure reliably the expenditure attributable to the intangible asset during its development. Development costs not meeting these criteria for capitalisation are expensed as incurred. Directly attributable costs include (if relevant) employee costs incurred on software development along with an appropriate portion of relevant overheads and borrowing costs. The Company maintained the policy of recognising as an intangible asset, the costs arising from the development of its solutions, specifically the directly associated costs of its Research and Development center. The Company periodically reviews the principles and criteria of IAS 38 as outlined above. Up to and until June 2019, the Company has determined that all the above criteria were met. Effective as from 1 July 2019 and thereafter, the Company concluded that it would no longer continue recognising these costs as an intangible asset due to the fact that the criteria in IAS38 was not met. An intangible asset that was capitalised but not yet available for use, is not amortised and is subject to impairment testing once a year or more frequently if indications exist that there may be a decline in the value of the asset until the date on which it becomes available for use (see also Note 10). The amortisation of an intangible asset begins when the asset is available for use, i.e., it is in the location and condition needed for it to operate in the manner intended by management. The development asset is amortised on the straight-line method, over its estimated useful life, which is estimated to be ten years. The useful life and the amortisation method of each of the intangible assets with finite lives are reviewed at least at each financial year end. If the expected useful life of an asset differs from the previous estimate, the amortisation period is changed accordingly. Such a change is accounted for as a change in accounting estimate in accordance with IAS 8. H. Financial instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. 1. Classification and measurement of financial assets and financial liabilities Initial recognition and measurement The Company initially recognises trade receivables on the date that they originated. All other financial assets and financial liabilities are initially recognised on the date on which the Company becomes a party to the contractual provisions of the instrument. A financial asset or a financial liability are initially measured at fair value with the addition, for a financial asset or a financial liability that are not presented at fair value through profit or loss, of transaction costs that can be directly attributed to the acquisition or the issuance of the financial asset or the financial liability. Trade receivables that do not contain a significant financing component are initially measured at the price of the related transaction. Financial assets - subsequent classification and measurement A financial asset is measured at amortised cost if it meets the two following cumulative conditions and is not designated for measurement at fair value through profit or loss: • The objective of the entity’s business model is to hold the financial asset to collect the contractual cash flows; and • The contractual terms of the financial asset create entitlement on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. On initial recognition, financial assets that do not meet the above criteria are classified to measurement at fair value through profit or loss (FVTPL). Further, irrespective of the business model, financial assets whose contractual cash flows are not solely payments of principal and interest are accounted for at FVTPL. All derivative financial instruments fall into this category. Annual Report and Financial Statements for the year ended 31 December 2023 32 Notes to the Financial Statements Financial assets are not reclassified in subsequent periods, unless, and only to the extent that the Company changes its business model for the management of financial debt assets, in which case the affected financial debt assets are reclassified at the beginning of the reporting period following the change in the business model. Financial assets at amortised cost The Company has balances of trade and other receivables and deposits that are held under a business model, the objective of which is collection of the contractual cash flows. The contractual cash flows in respect of such financial assets comprise solely payments of principal and interest that reflects consideration for the time-value of the money and the credit risk. Accordingly, such financial assets are measured at amortised cost. In subsequent periods, these assets are measured at amortised cost, using the effective interest method and net of impairment losses. Interest income, currency exchange gains or losses and impairment are recognised in profit or loss. Any gains or losses on derecognition are also carried to profit or loss. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with all gains and losses and net changes in fair value recognised in the statement of comprehensive loss as financing income or cost. This category includes derivative instruments (including embedded derivatives that were separated from the host contract). Financial liabilities - classification, subsequent measurement and gains and losses Financial liabilities are classified to measurement at amortised cost or at fair value through profit or loss. All financial liabilities are recognised initially at fair value and, in the case of loans, borrowings, and payables, net of directly attributable transaction costs. Financial liabilities are measured at amortised cost This category includes trade and other payables, loans and borrowings including bank overdrafts. These financial liabilities are measured at amortised cost in subsequent periods, using the effective interest method. Interest expenses and currency exchange gains and losses are recognised in profit or loss. Any gains or losses on derecognition are also carried to profit or loss. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest method. The effective interest method amortisation is included as finance costs in profit or loss. Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss are measured at fair value, and any net gains and losses, including any interest expenses, are recognised in profit or loss. Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss, including derivative financial instruments entered into by the Company, including warrants derivative liability related to warrants with an exercise price denominated in a currency other than the Company’s functional currency and also including the Company’s liability to issue a variable number of shares, which include certain embedded derivatives (such as prepayment options) under a share subscription agreement - see Note 15. Separated embedded derivatives are classified as held for trading. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied. 2. Derecognition of financial liabilities Financial liabilities are derecognised when the contractual obligation of the Company expires or when it is discharged or cancelled. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 33 3. Impairment Financial assets The Company creates a provision for expected credit losses in respect of Financial assets measured at amortised cost. Expected credit losses are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, expected credit losses are provided for credit losses that result from default events that are possible within the next 12 months. For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime expected credit losses). The Company measures, if relevant, the provision for expected credit losses in respect of trade receivables at an amount that is equal to the credit losses expected over the life of the instrument. In assessing whether the credit risk of a financial asset has significantly increased since initial recognition and in assessing expected credit losses, the Company takes into consideration information that is reasonable and verifiable, relevant and attainable at no excessive cost or effort. Such information comprises quantitative and qualitative information, as well as an analysis, based on the past experience of the Company and the reported credit assessment, and contains forward-looking information. Measurement of expected credit losses Expected credit losses represent a probability-weighted estimate of credit losses. Credit losses are measured at the present value of the difference between the cash flows to which the Company is entitled under the contract and the cash flows that the Company expects to receive. Expected credit losses are discounted at the effective interest rate of the financial asset. 4. Derivative financial instruments Derivative financial instruments are accounted for at FVTPL. Embedded derivatives A derivative embedded in a hybrid contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate derivative if: the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the hybrid contract is not measured at fair value through profit or loss. Embedded derivatives are measured at fair value with changes in fair value recognised in profit or loss. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss category. As described in Note 15.E.[2], the Company has determined to designate its liability with respect to the share subscription agreement which include several embedded derivatives in its entirety at FVTPL category. Share-based compensation I. 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 the purpose of estimating the fair value of the granted equity instruments, the Company takes into consideration conditions which are not vesting conditions (or vesting conditions that are performance conditions which constitute market conditions). Non- market performance and service conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, an estimate is made of the number of instruments expected to vest. No expense is recognised for awards that do not ultimately vest because of service conditions and/or if non-market performance conditions have not been met. As an expense is recognised over the vesting period, when an expense has been recorded in one period and Annual Report and Financial Statements for the year ended 31 December 2023 34 Notes to the Financial Statements the options are cancelled in the following period, then the previously recorded expenses for options that never vested, as reversed. Grants that are contingent upon vesting conditions (including performance conditions that are not market conditions) which are not ultimately met are not recognised as an expense. A change in estimate regarding prior periods is recognised in the statement of comprehensive income over the vesting period. No expense is recognised for award that do not ultimately vest because service condition and/or non-market performance condition have not been made. Share-based payment transactions settled by equity instruments executed with other service providers are measured at the date the services were received, based on the estimated fair value of the services or goods received, unless their value cannot be reliably estimated. In such a case, the transaction is measured by estimating the fair value of the granted equity instruments. This amount is carried as an expense or is capitalised to the cost of an asset (if relevant), based on the nature of the transaction. Fair Value Measurements J. 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. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value. Maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities measured at fair value or for which fair value is disclosed are categorised into levels within the fair value hierarchy based on the lowest level input that is significant to the entire fair value measurement: • Level 1 – unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. • Level 2 – pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. • Level 3 – pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if any, market activity for the non-financial asset or liability at the measurement date. The inputs into the determination of fair value require significant management judgment or estimation. Level 3 inputs are considered as the lowest priority within the fair value hierarchy. For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy, as explained above. Fair-value related disclosures for financial instruments that are measured at fair value or where fair values are disclosed, are summarised in Note 26. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 35 K. Revenue recognition The Company generates revenues mainly from: • sales of solutions-based product offerings • sales of programmable devices (“FPGA”) with embedded intellectual property (“IP”) developed by the Company, • IP developed by the Company together with software application tools to assist its customers to design their own systems based on the Company IP and • maintenance and support services provided to customers. The Company recognises revenue when the customer obtains control over the promised goods or when the Company has delivered the products 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 provided to the customer. Identification of the contract The Company treats a contract with a customer only where all of the following conditions are fulfilled. 1. The parties to the contract have approved the contract (in writing, orally or according to other customary business practices) and they are committed to satisfying their obligations thereunder; 2. The Company is able to identify the rights of each party in relation to the goods or services that are to be transferred; 3. The Company is able to identify the payment terms for the goods or services that are to be transferred; 4. The contract has commercial substance (i.e., the entity’s risk, timing and amount of future cash flows are expected to change as result of the contract); and 5. It is probable that the consideration to which the Company is entitled to in exchange for the goods or services transferred to the customer will be collected. Identification of performance obligations On the contract’s inception date, the Company assesses the goods or services committed to in the contract with the customer and identifies, as a performance obligation, any promise to transfer to the customer one of the following: • Goods or services that are distinct; or • A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. The Company identifies goods or services promised to the customer as being distinct when the customer can benefit from the goods or services on their own or in conjunction with other readily available resources and the Company’s promise to transfer the goods or services to the customer separately identifiable from other promises in the contract. In order to examine whether a promise to transfer goods or services is separately identifiable, the Company examines whether it is providing a significant service of integrating the goods or services with other goods or services promised in the contract into one integrated outcome that is the purpose of the contract. Contracted revenues attached to milestone performance in a contract are recognised by the Company when it has completed a milestone requirement and the Company has delivered the goods and/or services connected to such milestone. Determination of the transaction price The transaction price is the amount of the consideration to which the Company expects to be entitled in exchange for the goods or services promised to the customer, other than amounts collected for third parties. The Company takes into account the effects of all the following elements when determining the transaction price; variable consideration (see below), the existence of a significant financing component, non-cash consideration, and consideration payable to the customer. Annual Report and Financial Statements for the year ended 31 December 2023 36 Notes to the Financial Statements Variable consideration The transaction price includes fixed amounts and amounts that may change as a result of discounts, credits, price concessions, incentives, penalties, claims and disputes and contract modifications where the consideration in their respect has not yet been agreed to by the parties. In accordance with the requirements in IFRS 15 on constraining estimates of variable consideration, the Company includes the amount of the variable consideration, or part of it, in the transaction price at contract inception, only when it is considered highly probable that its inclusion will not result in a significant revenue reversal in the future when the uncertainty has been subsequently resolved. At the end of each reporting period and if necessary, the Company revises the amount of the variable consideration included in the transaction price. Satisfaction of performance obligations Revenue is recognised when the Company satisfies a performance obligation, or by transferring control over promised goods or having provided services to the customer, as applicable. Sales of goods Revenues from the sale of programmable devices are recognised at the point in time when control of the asset is transferred to the customer, which is generally upon delivery of the devices. 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, delivery of existing schematics, prototypes, software drivers or design kit, or development of new product offerings or new features of existing products such as programmable devices (“design tools”). Management has determined that the performance obligations under such arrangements which are generally based on separate milestones, are recognised at the point in time when such separate milestone is transferred to the customer, generally upon completion of the related milestone. Amounts received (including specific up-front payments), which relate to milestones that were not yet achieved, are deferred and are presented as deferred revenues. Multiple element transactions Some of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts 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 determines the standalone selling prices based on an overall pricing objectives, taking into consideration market conditions and other factors. Revenues are then recognised for each separate performance obligations - sales of goods or designed tools, based on the criteria described in the above paragraph. Revenue from royalties The Company is entitled to royalties based on sales performed by third parties of products which contain IP developed by the Company. For arrangements that include such sales-based royalties, including milestone payments based on the level of sales, and the license of the IP developed by the Company is deemed to be the predominant item to which the royalties relate, the Company recognises revenue at the later of (i) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied), or (ii) when the related sales occur. Accordingly, revenues from royalties that are reported by the customer are recognised based on the actual sales of products as reported to the Company. Revenues from maintenance and support Revenue from maintenance and support is recognised over the term of the maintenance and support period. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 37 Impairment testing of non-financial assets L. 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 the 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, being the 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 linked to the Company’s latest approved budget, see also Note 10. M. Leased assets The Company considers whether a contract is or contains a lease. A lease is defined as ‘a contract, or part of a contract, which conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.’ To apply this definition the Company assesses whether the contract meets three key evaluations which are whether: • the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Company • the Company has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract • the Company has the right to direct the use of the identified asset throughout the period of use. The Company assesses whether it has the right to direct ‘how and for what purpose’ the asset is used throughout the period of use. Measurement and recognition of leases as a lessee At the lease commencement date, the Company recognises a right-of-use asset and a lease liability on the balance sheet. The right- of-use asset is measured at cost, which is made up of the initial measurement of the lease liability, any initial direct costs incurred by the Company, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received). The Company depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Company also assesses the right-of-use asset for impairment when such indicators exist. At the lease commencement date, the Company measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Company’s incremental borrowing rate. Lease payments included in the measurement of the lease liability are made up of fixed payments (including in substance fixed), variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised. Subsequent to initial measurement, the liability is reduced for payments made and increased for interest. It is re-measured to reflect any reassessment or modification, or if there are changes in in-substance fixed payments. When the lease liability is re-measured, the corresponding adjustment is reflected in the right-of-use asset, or profit and loss if the right-of-use asset is already reduced to zero. The Company has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term. On the statement of financial position, right-of-use assets have been included under non-current assets and the current portion of lease liabilities have been included in other current liabilities. Annual Report and Financial Statements for the year ended 31 December 2023 38 Notes to the Financial Statements N. Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Company. Amendments to IAS 1: Classification of Liabilities as Current or Non-current In January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 to specify the requirements for classifying liabilities as current or non-current. The amendments clarify: • What is meant by a right to defer settlement • That a right to defer must exist at the end of the reporting period • That classification is unaffected by the likelihood that an entity will exercise its deferral right • That only if an embedded derivative in a convertible liability is itself an equity instrument would the terms of a liability not impact its classification. The amendments are effective for annual reporting periods beginning on or after 1 January 2024 and must be applied retrospectively. The Company is currently assessing the impact the amendments will have on current practice and whether existing loan agreements may require renegotiation. Other Standards and amendments that are not yet effective and have not been adopted early by the Company are not expected to have a significant impact on the financial statements in the period of initial application and therefore the disclosures have not been made. NOTE 4 – SIGNIFICANT MANAGEMENT JUDGEMENT IN APPLYING ACCOUNTING POLICIES AND ESTIMATION UNCERTAINTY When preparing the financial statements, management makes a number of judgements, estimates and assumptions about the recognition and measurement of assets, liabilities, income and expenses. Significant management judgement • Leases – determination of the appropriate lease period to measure lease liabilities The Company enters into leases with third-party landlords and in order to calculate the lease liability, the Company assess if any lease option extensions will be exercised. The lease for the Company’s offices was for 5 years with an option to extend it for a further 5 years. The Company initially expected this lease to be extended for an additional 5 years. At the end of 2023, the Company’s assessment was that it may not exercise the additional 5-year option given the decline in rental prices within the premises market - see Note 11. Estimation uncertainty • Impairment of non-financial assets In assessing impairment of non-financial assets (primarily, internally developed intangible assets), management estimates the recoverable amount of each asset or cash generating units (if relevant) based on expected future cash flows and uses an interest rate to discount them (i.e.,the value in use. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate. See Note 10 for assumptions used in determining fair value. • Fair value measurement of financial instruments When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, Management uses various valuation techniques to determine the fair value of such financial instruments and non-financial assets. This involves developing estimates and assumptions consistent with how market participants would price the instrument. Management bases its assumptions on observable data as far as possible but this is not always available. In that case, management uses the best information available. Estimated fair values may vary from the actual prices that would be achieved in an arm’s length transaction at the reporting date. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments (see Note 15). Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 39 NOTE 5 – CASH Cash consist of the following: In Great British Pounds In U.S. Dollar In Euro In New Israeli Shekel The cash does not have any restrictions as to what it may be used for. NOTE 6 – TRADE RECEIVABLES Trade receivables consist of the following: Trade receivables and unbilled revenue Less: provision for expected credit losses Total receivables US dollars 31 December 2023 855,348 470,595 – 667,865 1,993,808 2022 89,695 205,285 2,751 418,084 715,815 US dollars 31 December 2023 885,145 (699,000) 186,145 2022 1,878,072 (579,000) 1,299,072 All amounts are short-term. The net carrying value of these receivables is considered a reasonable approximation of fair value. All of the Company’s trade and other receivables have been reviewed for the possibility of loss (an allowance for impairment losses). See also Note 26A. NOTE 7 – INVENTORIES Components and raw materials Finished cards and boards Total inventories US dollars 31 December 2023 331,815 203,874 535,689 2022 613,218 159,858 773,076 Annual Report and Financial Statements for the year ended 31 December 2023 40 Notes to the Financial Statements NOTE 8 – OTHER CURRENT ASSETS Other current assets consist of the following: Prepaid Expenses Deposits to suppliers Government institutions Other current assets Total other current assets NOTE 9 – PROPERTY AND EQUIPMENT Details of the Company’s property and equipment are as follows: US dollars 31 December 2023 377,419 – 50,456 – 427,875 2022 203,955 1,857 129,659 8,401 343,872 Gross carrying amount Balance 1 January 2023 Additions Balance 31 December 2023 Depreciation Balance 1 January 2023 Depreciation Balance 31 December 2023 Carrying amount 31 December 2023 Gross carrying amount Balance 1 January 2022 Additions Balance 31 December 2022 Depreciation Balance 1 January 2022 Depreciation Balance 31 December 2022 Carrying amount 31 December 2022 Testing equipment Computers Furniture and equipment Leasehold improvements Total US dollars 1,122,474 147,333 1,269,807 (378,576) (121,330) (499,906) 769,901 176,129 780 176,909 (155,512) (11,942) (167,454) 9,455 55,397 – 55,397 (19,473) (3,460) (22,933) 32,464 US dollars 11,193 1,365,193 – 148,113 11,193 1,513,306 (1,306) (1,397) (2,703) 8,490 (554,867) (138,129) (692,996) 820,310 Testing equipment Computers Furniture and equipment Leasehold improvements Total 881,112 241,362 1,122,474 (286,980) (91,596) (378,576) 743,898 164,813 11,316 176,129 (143,204) (12,308) (155,512) 20,617 49,237 6,160 55,397 (16,096) (3,377) (19,473) 35,924 11,193 1,106,355 – 258,838 11,193 1,365,193 (6) (1,300) (1,306) 9,887 (446,286) (108,581) (554,867) 810,326 Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 41 NOTE 10 – INTANGIBLE ASSET Details of the Company’s intangible asset (R&D) is as follows: Gross carrying amount Balance 1 January 2023 Additions Balance 31 December 2023 Amortisation Balance 1 January 2023 Amortisation Balance 31 December 2023 Carrying amount 31 December 2023 Gross carrying amount Balance 1 January 2022 Additions Balance 31 December 2022 Amortisation Balance 1 January 2022 Amortisation Balance 31 December 2022 Carrying amount 31 December 2022 US dollars Total 9,550,657 – 9,550,657 4,087,857 961,380 5,049,237 4,501,420 US dollars Total 9,550,657 – 9,550,657 3,126,477 961,380 4,087,857 5,462,800 The Company tested the capitalised intangible assets for impairment as of 31 December 2023. Such analysis revealed a similar calculation as that determined as at 31 December 2022 and therefore no impairment is warranted. Having given due consideration to the following, the Company believes that no impairment is required. • Considering the past and future expected revenues from the capitalized R&D assets; • The anticipated outcomes of current discussions and engagements with customers; • The customer projections and where the customer believes engagement, testing, field trials and deployment will take place; • Signed engagements or commercial discussion phases and anticipated outturns; • Development cost elements (R&D resources); • Cash resources required to meet the forecast costs for the developments; • Current cash resources at the time; • Requirements if any for raising funds to ensure funds are freely available; • Ease of fund raising; • Revenues recognised and collected to date which are attributed to the intangible asset technology. Annual Report and Financial Statements for the year ended 31 December 2023 42 Notes to the Financial Statements The valuation method determined, to best reflect the fair value of the intangible assets, was the Discounted Cash Flow (“DCF”) to be generated from such assets between 2024 through 2033. The primary assumptions used in determining the value-in-use of these intangible assets are as follows: • • Corporate tax rate for the Company remains at 23%. The pre-tax discount rate used to value future cash flows is 28.3% (post-tax 23.5%). The possibility exists that there could be a change in these key assumptions used to calculate the value-in-use of the intangible assets, which could cause the balance recorded in these financial statements to exceed such value-in-use. As at 31 December 2023 the value-in-use of the intangible assets exceeds the amount shown in these financial statements by $4.8 million. NOTE 11 – LEASES A. Details of the Company’s right of use assets are as follows: Gross carrying amount Balance 1 January 2023 Expectation change, of option to exercise the lease Balance 31 December 2023 Accumulated depreciation Balance 1 January 2023 Depreciation expense Balance 31 December 2023 Total right-of-use assets as at 31 December 2023 Gross carrying amount Balance 1 January 2022 Terminations Balance 31 December 2022 Accumulated depreciation Balance 1 January 2022 Terminations Depreciation expense Balance 31 December 2022 Total right-of-use assets as at 31 December 2022 Buildings 3,158,849 – 3,158,849 (26,324) – (315,884) (342,208) 2,816,641 B. Lease liabilities are presented in the statement of financial position as follows: Current Non-current US dollars Buildings 3,158,849 (1,324,807) 1,834,042 (342,208) (315,884) (658,092) 1,175,950 US dollars Vehicles Total 95,702 (95,702) 3,254,551 (95,702) – 3,158,849 (72,025) 95,702 (23,677) – – (98,349) 95,702 (339,561) (342,208) 2,816,641 US dollars 31 December 2023 341,991 764,366 1,106,357 2022 207,161 2,505,777 2,712,938 Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 43 C. In October 2021, the Company committed to a five-year lease agreement for its primary offices in Airport City Israel. At the termination of the lease, the Company has an option to renew it for a further five years. As at 31 December 2022 such renewal option was considered as reasonably certain to be exercised according to IFRS 16. At 31 December 2023, the Company’s assessment was that it may not exercise the additional 5-year option given the change in the Company’s needs and the decline in rental market prices. As such the Company recalculated the lease liability using an updated discount rate. The amount of such reduction in the liability, was accordingly reduced from the right-of-use asset value. Each lease generally imposes a restriction that, the right-of-use asset can only be used by the Company. Leases are either non-cancellable or may only be cancelled by incurring a substantive termination fee. Some leases contain an option to extend the lease for a further term or for the employee who used the leased item to purchase the underlying leased asset outright at the end of the lease term. The Company is prohibited from selling or pledging the underlying leased assets as security. For leases over office buildings and factory premises the Company must keep those properties in a good state of repair and return the properties in their original condition at the end of the lease. Further, the Company must insure items of property, plant and equipment and incur maintenance fees on such items in accordance with the lease contracts. D. The lease liabilities are secured by the related underlying assets. Future minimum lease payments at 31 December 2023 were as follows: Lease payments Finance charges Net present values NOTE 12 – SHORT-TERM BORROWINGS Borrowings include the following financial liabilities: Bank borrowings Total short- term borrowings Minimum lease payments due 2024 442,011 (100,020) 341,991 US dollars 2025-2026 847,186 (82,820) 764,366 Total 1,289,197 (182,840) 1,106,357 Annual % Interest rate(1) 2023 P+4.5% US dollars 31 December 2023 96,306 96,306 2022 428,935 428,935 (1) The loans bore variable interest of prime + 4.5%. The loans were fully repaid by February 2024. NOTE 13 – 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 14) Accrued expenses and other Deferred revenue Short term lease liability Related parties* Total other short-term liabilities US dollars 31 December 2023 458,435 118,955 23,000 127,691 250,200 341,991 287,625 2022 426,211 235,442 – 121,770 20,337 207,161 110,988 1,607,897 1,121,909 * Relates to compensation from prior years and the outstanding preferred loan to the Company (see Note 28.A.). These amounts do not bear interest. Annual Report and Financial Statements for the year ended 31 December 2023 44 Notes to the Financial Statements NOTE 14 – IIA ROYALTY LIABILITY During the years 2005 through 2012, the Company received grants from the Israel Innovation Authority (“IIA”) totaling approximately $3.1 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’s revenue attributable to the technology funded by the IIA, up to an amount equal to the grants received plus interest from the date of the grant, which after having repaid approximately $543,000 (2022: $535,000) of these grants over numerous years, as at 31 December 2023 the amount still due is approximately $4.4 million. Such contingent obligation has no expiration date. NOTE 15 – EQUITY A. Details regarding share capital and number of shares at 31 December 2023 and at 31 December 2022 are: Share capital: Ordinary shares of NIS 0.001 par value Total share capital Number of shares: Ordinary shares of NIS 0.001 par value - authorised Ordinary shares of NIS 0.001 par value - issued and paid up US dollars 31 December 2023 103,417 103,417 2022 21,904 21,904 31 December 2023 2022 600,000,000 100,000,000 376,721,091 78,084,437 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. Share premium C. Share premium includes proceeds received from the issuance of shares, after allocating the nominal value of the shares issued to share capital. Transaction costs associated with the issuance of shares are deducted from the share premium, net of any related income tax benefit. The costs of issuing new shares charged to share premium during the year ended 31 December 2023 was $262,484 (2022: $9,952). D. Other components of equity Other components of equity include the value of equity-settled share and option-based payments provided to employees and consultants. When employees and consultants forfeit their options, the costs related to such forfeited options are reversed out to other components of equity – see Note 16.A. Shares issued during the accounting periods E. During the year ended 31 December 2023, 298,636,654 (2022: 2,732,699) ordinary shares were issued, as follows: Issuance of ordinary shares )issued together with warrants( Shares issued pursuant to share subscription agreement Expenses paid for in shares Number of shares issued during year ended 31 December Note [1] [2] [3] 2023 127,188,097 168,933,439 2,515,118 2022 – 2,695,593 37,106 298,636,654 2,732,699 Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 45 [1] Details of the equity raises are as follows: January 2023 equity raise In January 2023 the Company issued 23,571,430 shares attached to a corresponding 23,571,430 warrants. Each share with its attached warrant was issued for £0.07, realising gross proceeds of $2.02 million (£1.65 million) and net proceeds after issuance expenses of approximately $1.89 million (£1.54 million). Each warrant was initially exercisable at £0.15 with a life term of approximately 24 months. The warrants are not transferable, are not traded on an exchange and have an accelerator clause, whereby these warrants may be called by the Company if the closing mid-market share price of the Company exceeded £0.20 over a 5-consecutive day period. If such 5-consecutive day period condition is met, the Company may serve notice on the warrant holders to exercise their relevant warrants within 7 calendar days, failing which, such remaining unexercised warrants shall be cancelled. As the exercise price of the warrants is denominated in GBP and not in the Company’s functional currency, it was determined that the Company’s obligation under such warrants cannot be considered as an obligation to issue a fixed number of equity instruments in exchange for a fixed amount of cash. Accordingly, it was determined that such warrants represent a derivative financial liability required to be accounted for at fair value through the profit or loss category. Upon initial recognition the Company allocated the gross proceeds as follows: an amount of approximately $133,000 was allocated as a derivative warrants liability with the remainder of the proceeds amounting to $1.75 million (after deduction of the allocated issuance costs of $0.14 million) being allocated to share capital and share premium. The issuance expenses were allocated in a consistent manner to the above allocation. The expenses related to the warrant component were carried to profit or loss as an immediate expense while the expenses related to the share capital component were netted against the amount carried to equity. In subsequent periods the company measures the derivative financial liability at fair value and the periodic changes in fair value are carried to profit or loss under financing costs or financing income, as applicable. The fair value of the derivative warrant liability is categorized as level 3 of the fair value hierarchy. The fair value valuation of the warrants was based on the Black-Scholes option pricing model, calculated in two stages. Initially, the fair value of these call warrants issued to investors were calculated, assuming no restrictions applied to such call warrants. As the Company, under certain circumstances, has a right to force the investors to either exercise their warrants or have them cancelled, the second calculation calculates the value of the warrants as call warrants that were issued by the investor to the company. The net fair value results from reducing the call investor warrants fair value from the call warrants fair value, as long as the intrinsic value of the call warrants (share price at the period end less exercise price of the warrants) is not greater than such value. Should the intrinsic value of the warrants be higher than the Black-Scholes two stage method described above, then the intrinsic value of the warrants is considered to be a more accurate measure to use in determining the fair value. The following factors were used in calculating the fair value of the warrants at their issuance: Risk free rate Volatility In May 2023, the Company changed the terms of the warrants as follows: Changed: Exercise price of warrants Share price at which accelerator clause may be activated 4.2% 82.3% To £0.060 £0.075 From £0.15 £0.20 David Levi and Shavit Baruch hold 3,028,571 and 668,771 warrants respectively, by virtue of their participation in the January 2023 fundraise as outlined below. The terms of the warrants David Levi and Shavit Baruch hold were varied alongside the other warrants issued as detailed above. Of the 23,571,430 shares and 23,571,430 warrants subscribed for, the director’s participation in this issuance was 3,697,342 shares and 3,697,342 warrants, on the same terms that outside investors participated as detailed below: • David Levi subscribed for 3,028,571 placing shares for an aggregate sum of £212,000. • Shavit Baruch subscribed for 668,771 placing shares for an aggregate sum of £46,814. Annual Report and Financial Statements for the year ended 31 December 2023 46 Notes to the Financial Statements None of these warrants had been exercised by 31 December 2023 and their fair value of approximately $3,000 at such date is disclosed as a warrants liability in the statement of financial position. Upon this successful equity raise being concluded, the brokers for this transaction received 573,429 two year warrants exercisable at £0.07 per warrant. The fair-value of these warrants at the time of issuance was approximately $23,000. As at 31 December 2023, none of these warrants have been exercised. May 2023 equity raise In May 2023 the Company issued 26,116,667 shares at £0.03 per share, realising gross proceeds of $0.98 million (£0.78 million) and net cash proceeds after issuance expenses of $0.92 million (£0.74 million). Of the 26,116,667 shares subscribed for, the director’s participation in this issuance was 916,668 shares, on the same terms that outside investors participated as detailed below: • David Levi, subscribed for 833,334 Placing Shares for an aggregate sum of £25,000. • Yosi Albagli, subscribed for 83,334 Placing Shares for an aggregate sum of £2,500. The gross proceeds, after deduction of the issuance costs were allocated to share capital and share premium. Upon this successful equity raise being concluded, the brokers for this transaction received 772,500 two year warrants exercisable at £0.03 per warrant. The fair-value of these warrants at the time of issuance was approximately $14,000. As at 31 December 2023, none of these warrants have been exercised. December 2023 equity raise In December 2023 the Company issued 70,000,000 shares at £0.01 per share, realising gross proceeds of $0.88 million (£0.70 million) and net cash proceeds after issuance expenses of $0.83 million (£0.66 million). Concurrent with this equity raise the Company’s CEO and director, David Levi, converted $94,500 (£75,000) of loans owed to him, into 7,500,000 shares. The gross proceeds, after deduction of the issuance costs were allocated to share capital and share premium. No warrants were issued in this equity raise. [2] Shares issued pursuant to share subscription agreement In February 2022, an institutional investor (“Investor”) who had previously subscribed for shares in the Company, signed a new $2.0 million share subscription agreement bearing a face value of $2,060,000. The Investor has the right, at its sole discretion to require the Company to issue shares in relation to the subscription amount outstanding (or a part of it), under which, the number of shares to be issued for such settlement, shall be determined by dividing the face value of the subscription amount by the Settlement Price. The Settlement Price is equal to the sum of (i) the Reference Price and (ii) the Additional Price. The Reference Price is the average of the 3 daily volume-weighted average prices (“VWAPs”) of Shares selected by the Investor during a 15 trading day period immediately prior to the date of notice of their issue, rounded down to the next one tenth of a penny. The Additional Price is equal to half of the excess of 85% of the average of the daily VWAPs of the Shares during the 3 consecutive trading days immediately prior to the date of notice of their issue over the Reference Price. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 47 Accounting treatment As the company’s obligation under the share subscription agreement with respect for each subscription amount received by the Company, represent an obligation to be settled through the issuance of a variable number of shares and as the agreements include embedded derivatives (such as principal amounts indexed to an average price of equity instrument) the Company has designated this obligation as financial liability at fair value through profit or loss under “liability related to share subscription agreement”. Accordingly, upon initial recognition and at each reporting period the liability is measured at fair value with changes carried to profit or loss under financing costs or financing income, as applicable. Upon settlement or a partial settlement of such liability, when the investor calls for the settlement of the aggregate subscription amount outstanding (or any part of it), for a fixed number of shares, as calculated upon such settlement notice, the fair value of the liability, related to the settled portion is carried to equity. The fair value of the liability related to share subscription agreement is categorised as level 3 of the fair value hierarchy. See Note 26.B. Activity for year ending 31 December 2022 In March 2022 the full $2.0 million was funded as a prepayment for the subscription shares. The Investor converted the following subscription amount during 2022: Notice date of conversion 22 September 2022 Face value converted - USD 320,000 Shares Issued 2,695,593 As described above, the Investor converts subscription amounts into shares of the Company at a discounted price. Upon each conversion, the difference between the actual market value of shares issued to the Investor and the amount converted, is recorded in finance costs, which in 2022 amounted to $74,437. Activity for year ending 31 December 2023 All remaining outstanding subscription amounts were converted during 2023, thereby bringing the relationship to a conclusion, without any balances remaining as at 31 December 2023: The following subscription amounts were converted during 2023: Notice date of conversion 22 May 2023 31 July 2023 29 September 2023 (*) 10 November 2023 (*) Per settlement deed, described below. Face value converted – USD 230,000 100,000 74,000 1,336,000 Shares Issued 6,629,236 4,897,352 7,406,851 150,000,000 168,933,439 As mentioned above, the Investor converts subscription amounts into shares of the Company at a discounted price. Upon each conversion, the difference between the actual market value of shares issued to the Investor and the amounts converted amounted to $22,771 in 2023, which is recorded as a reduction to finance income. In November 2023 the Company and the Investor entered into a settlement deed, whereby the Company would issue 150,000,000 shares to the Investor (the “Settlement Shares”) to terminate the Subscription Agreement and extinguish the Company’s liability to the Investor. The Settlement Shares would be issued in tranches, to comply with a restriction that the Investor cannot hold an interest in more than 24.99% of the Company’s issued share capital. The Settlement Shares were issued in tranches. 44.9 million shares on 10 November 2023, 43.6 million shares on 29 November 2023 and 61.5 million shares on 14 December 2023. The resulting finance charges recognized from this transaction was approximately $1,030,000. Annual Report and Financial Statements for the year ended 31 December 2023 48 Notes to the Financial Statements [3] Expenses paid for in shares As part of the agreed remuneration as non-Executive Chairman for the period from 10 March 2021 to 28 February 2022, Joseph Albagli is entitled to receive shares equal to a monthly amount of £1,250. On 14 April 2022 the Company issued 37,106 shares in lieu of the $20,158 owing to Joseph Albagli for the above-mentioned period. On 6 July 2023 the Company issued 126,347 shares in lieu of the £15,000 owing to Joseph Albagli for the period from 1 March 2022 to 28 February 2023. See Note 28.C. In January 2023, service providers to the Company agreed to receive 2,388,771 shares at the January 2023 equity raise issue price of GBP 0.07 in satisfaction of £167,214 of outstanding fees due to them. These shares are subject to a one-year lock-in period. NOTE 16 – SHARE-BASED COMPENSATION A. In 2013 the Company’s Board of Directors approved a share option plan for the grant of options without consideration, to employees, service providers and directors of the Company, which are exercisable into the Company’s ordinary shares. The exercise price and vesting period (generally four years) for each grantee of options, is determined by the Company’s Board of Directors and specified in such grantee’s option agreement. In accordance with Section 102 of the Israel tax code, the Israeli resident grantee’s options, are held by a trustee. The options are not cashless (they need to be paid for) and expire upon the expiration date determined by the Board of Directors (generally ten years from the date of the grant). The expiration date may be brought forward upon the termination of grantee’s employment or services to the Company. Options do not vest after the termination of employment or services to the Company. 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 Exercise price in $ Recipients of the options Approximate fair value at grant date (in $): 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 2022 31 December 2023 Option grant dates 22 Feb 2023 17 Feb 2022 17 Feb 2022 590,000 0.166 130,000 0.545 751,000 0.395 Employees Employees Employees 31,685 0.2905 3.93% 0.00% 70% 10.0 – 7,296 35,902 0.29 2.98% 0.00% 70% 10.0 22,477 19,739 219,220 0.29 2.98% 0.00% 70% 10.0 119,599 101,316 The remaining value of these options at 31 December 2023, which have yet to be recorded as expenses, amount to $45,045 (2022: $159,127). As some of these employees left the employ of the company prior to 31 December 2023, their options were cancelled. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 49 Share based compensation was treated in these financial statements as follows: Total expensed amount recorded Total US dollars Year ended 31 December 2023 72,287 72,287 2022 221,362 221,362 The following tables present a summary of the status of the employee option grants by the Company as of 31 December 2023 and 2022: Year ended 31 December 2023 Balance outstanding at beginning of year Granted Exercised Forfeited Balance outstanding at end of the year Balance exercisable at the end of the year Year ended 31 December 2022 Balance outstanding at beginning of year Granted Exercised Forfeited Balance outstanding at end of the year Balance exercisable at the end of the year Weighted average exercise price (US$) 0.31 0.17 0.10 (0.26) 0.37 Weighted average exercise price (US$) 0.27 0.42 0.10 0.36 0.31 Number 3,691,920 590,000 – (2,524,920) 1,757,000 1,177,333 Number 2,951,920 881,000 – (141,000) 3,691,920 2,333,503 B. The option pool was increased to 6,500,000 options by a resolution passed on 16 December 2021 and approved by the tax authorities. Annual Report and Financial Statements for the year ended 31 December 2023 50 Notes to the Financial Statements C. The following table summarises information about employee options outstanding at 31 December 2023: Exercise price $0.20 £0.12 £0.14 £0.20 £0.21 £0.21 £0.29 £0.29 £0.33 £0.40 £0.45 £1.05 £1.00 £1.00 Outstanding at 31 December 2023 Weighted average remaining contractual life (years) Weighted average exercise price (US$) Exercisable at 31 December 2023 Weighted average remaining contractual life (years) 20,000 33,000 130,000 230,000 70,000 200,000 164,000 400,000 65,000 130,000 225,000 40,000 30,000 20,000 3.2 6.6 6.3 6.9 6.5 6.9 8.1 8.1 6.6 5.0 6.6 3.2 4.5 5.6 0.20 0.16 0.17 0.26 0.26 0.27 0.39 0.39 0.46 0.54 0.60 1.28 1.32 1.25 20,000 33,000 50,000 230,000 70,000 200,000 41,000 233,333 32,500 65,000 112,500 40,000 30,000 20,000 The following table summarises information about employee options outstanding at 31 December 2022: 1,757,000 1,177,333 Exercise price $0.10 $0.20 £0.12 £0.20 £0.21 £0.21 £0.29 £0.29 £0.33 £0.40 £0.45 £1.05 £1.40 £1.00 £1.00 Outstanding at 31 December 2022 1,128,920 129,000 73,000 370,000 140,000 200,000 311,000 400,000 175,000 130,000 455,000 40,000 30,000 60,000 50,000 Weighted average remaining contractual life (years) Weighted average exercise price (US$) 0.5 4.2 7.6 7.9 7.5 7.9 9.1 9.1 7.6 5.6 7.6 4.2 4.7 5.5 6.6 0.10 0.20 0.16 0.26 0.26 0.27 0.39 0.39 0.46 0.54 0.60 1.28 1.83 1.32 1.25 Exercisable at 31 December 2022 1,128,920 129,000 73,000 246,667 105,000 166,667 14,250 100,000 43,750 32,500 113,750 40,000 30,000 60,000 50,000 3,691,920 2,333,503 3.2 6.6 6.3 6.9 6.5 6.9 8.1 8.1 6.6 5.0 6.6 3.2 4.5 5.6 Weighted average remaining contractual life (years) 0.5 4.2 7.6 7.9 7.5 7.9 9.1 9.1 7.6 5.6 7.6 4.2 4.7 5.5 6.6 Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 51 The fair value of options granted to employees was determined at the date of each grant. The fair value of the options granted are expensed in the profit and loss, except for those that were allocated to capitalised research and development costs (up to and including 30 June 2019). D. Options issued to the IPO broker Upon the IPO consummation the Company issued five-year options to the IPO broker to purchase up to 162,591 shares of the Company at an exercise price of £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. Costs incurred in raising equity finance were applied as a reduction from those equity sale proceeds and is recorded in Other Components of Equity. Such warrants expired on 29 June 2022. E. a. b. c. d. Shares and equity instruments issued in lieu of payment for services provided Upon the successful equity raise concluded in January 2023, as described in Note 15.E.[1], the brokers responsible for this transaction received 573,429 two year warrants exercisable at £0.07 per warrant. The fair-value of these warrants at the time of issuance was approximately $23,000. Upon the successful equity raise concluded in May 2023, as described in Note 15.E.[1], the brokers responsible for this transaction received 573,429 two year warrants exercisable at £0.07 per warrant. 772,500 two year warrants exercisable at £0.03 per warrant. The fair-value of these warrants at the time of issuance was approximately $14,000. During 2023 the Company issued 126,347 (2022: 37,106) shares to the Company’s non-executive chairman in lieu of $19,000 (2022: $20,000) owing as part of his agreed remuneration. See also Note 15.E.[3] and Note 28.C. In January 2023, service providers to the Company agreed to receive 2,388,771 shares at the January 2023 equity raise issue price of GBP 0.07 in satisfaction of £167,214 of outstanding fees due to them. See also Note 15.E.[3]. NOTE 17 – REVENUE Sales Royalties Maintenance and support Total revenue US dollars Year ended 31 December 2023 2022 3,386,583 2,546,289 231,344 159,992 232,805 158,330 3,777,919 2,937,424 Annual Report and Financial Statements for the year ended 31 December 2023 52 Notes to the Financial Statements NOTE 18 – RESEARCH AND DEVELOPMENT EXPENSES Employee remuneration, related costs and subcontractors (*) Maintenance of software and computers Insurance and other expenses Amortisation Grant procurement expenses Total research and development expenses (*) Including share based compensation. NOTE 19 – GENERAL AND ADMINISTRATIVE EXPENSES Employee remuneration and related costs (*) Professional fees Rentals and maintenance Depreciation Travel expenses Impairment losses of trade receivables Total general and administrative expenses (*) Including share based compensation. NOTE 20 – MARKETING EXPENSES Employee remuneration and related costs (*) Marketing expenses Travel expenses Total marketing expenses (*) Including share based compensation. NOTE 21 – OTHER INCOME This is a government grant related to an expense item and is recognised as other income. US dollars Year ended 31 December 2023 2022 3,845,860 5,458,163 151,473 120,719 961,380 81,265 5,160,697 58,755 134,651 57,006 961,380 7,595 6,618,795 160,134 US dollars Year ended 31 December 2023 459,345 488,198 220,066 454,013 – 220,220 1,841,842 17,710 2022 666,500 496,865 305,927 446,816 8,608 599,200 2,523,916 51,627 US dollars Year ended 31 December 2023 541,674 66,669 12,709 621,052 (4,178) 2022 903,834 258,094 5,606 1,167,534 9,601 Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 53 NOTE 22 – FINANCING COSTS Bank fees, interest and others Lease liability financial expenses Revaluation of liability related to share subscription agreement measured at FVTPL Expenses allocated to issuing warrants Expenses allocated to share subscription agreement Total financing costs NOTE 23 – FINANCING INCOME Revaluation of warrant derivative liability Interest received Exchange rate differences, net Total financing income US dollars Year ended 31 December 2023 82,570 200,260 974,980 10,096 – 1,267,906 2022 35,150 227,246 230,992 – 80,000 573,388 US dollars Year ended 31 December 2023 129,703 226 53,882 183,811 2022 1,214,993 1,507 51,152 1,267,652 NOTE 24 – TAX EXPENSE A. The Company is assessed for income tax in Israel - its country of incorporation. The Israeli corporate tax rates for the relevant years is 23%. B. As of 31 December 2023, the Company has carry-forward losses for Israeli income tax purposes of approximately $35 million (2022: $31 million). These tax losses have no expiry date. According to management’s estimation of the Company’s future taxable profits, it is no longer probable in the foreseeable future, that future taxable profits would utilise all the tax losses. C. Theoretical tax reconciliation For the years ended 31 December 2023 and 2022, the following table reconciles the expected tax expense (benefit) per the statutory income tax rate to the reported tax expense in profit or loss as follows: Loss before tax Tax expense (benefit) at statutory rate Expected tax expense (benefit) at statutory rate Changes in taxes from permanent differences in share-based compensation Increase in loss carryforwards Income tax expense US dollars Year ended 31 December 2023 2022 6,364,747 8,002,612 23% 23% (1,463,892) (1,840,601) 16,626 50,913 1,447,266 1,789,688 – – Annual Report and Financial Statements for the year ended 31 December 2023 54 Notes to the Financial Statements NOTE 25 – BASIC AND DILUTED LOSS PER ORDINARY SHARE A. The earnings and the weighted average number of shares used in computing basic loss per ordinary share, are as follows: Loss for the year attributable to ordinary shareholders US dollars Year ended 31 December 2023 2022 (6,364,747) (8,002,612) Number of shares Year ended 31 December 2023 2022 Weighted average number of ordinary shares used in the computation of basic loss per ordinary share 143,876,859 76,013,296 B. As the Company has losses attributable to the ordinary shareholders, the effect on diluted loss per ordinary share is anti-dilutive and therefore the outstanding warrants and employee options have not been taken into account – see Note 16. NOTE 26 – FINANCIAL INSTRUMENTS AND RISK MANAGEMENT A. Financial risk and risk management 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 the operations of the Company. Currency basis of financial instruments Assets Cash Trade receivables Liabilities Short term borrowings Trade payables Warrants liability IIA royalty liability Non-current lease liabilities US dollars 31 December 2023 NIS GBP US $ Total 667,865 31,145 699,010 96,309 899,920 – – 764,366 1,760,595 (1,061,582) 855,348 – 855,348 – 22,417 2,841 – – 25,258 830,090 470,595 155,000 625,595 1,993,808 186,145 2,179,953 – 96,309 314,776 1,237,113 – 50,645 – 365,421 260,174 2,841 50,645 764,366 2,151,274 28,682 Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 55 Assets Cash Trade receivables Liabilities Short term borrowings Trade payables Liability related to share subscription agreement Non-current lease liabilities US dollars 31 December 2022 NIS GBP 418,084 259,368 677,452 428,935 626,256 – 2,505,777 3,560,968 (2,883,516) 89,695 – 89,695 – 21,909 – – 21,909 67,786 Euro 2,751 – 2,751 – – – – – US $ Total 205,285 1,039,704 1,244,989 – 137,418 1,836,555 – 1,973,973 715,815 1,299,072 2,014,887 428,935 785,583 1,836,555 2,505,777 5,556,850 2,751 (728,984) (3,541,963) • 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 Increase at the rate of Book value 31 December Effect on profit (loss)/equity (before tax) from the changes caused by the market factor Decrease at the rate of 10% (152,321) (3,115) 9,631 92,234 284 76,437 23,150 5% 2023 (76,161) 1,523,213 (1,557) 4,815 46,117 142 38,218 11,574 31,145 (96,306) (922,337) (2,841) (764,366) (231,492) 5% 76,161 1,557 (4,815) (46,117) (142) (38,218) (11,574) 10% 152,321 3,115 (9,631) (92,234) (284) (76,437) (23,150) Cash Trade receivables Short term borrowings Trade payables Warrants liability Non-current lease liabilities Total Annual Report and Financial Statements for the year ended 31 December 2023 56 Notes to the Financial Statements 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 Increase at the rate of 10% (51,053) (25,937) 42,894 64,817 250,578 281,299 5% (25,527) (12,968) 21,447 32,408 125,289 140,649 Book value 31 December 2022 510,530 259,368 (428,935) (648,165) (2,505,777) (2,812,979) Effect on profit (loss)/equity (before tax) from the changes caused by the market factor Decrease at the rate of 5% 25,527 12,968 (21,447) (32,408) (125,289) (140,649) 10% 51,053 25,937 (42,894) (64,817) (250,578) (218,299) Cash Trade receivables Short term borrowings Trade payables Non-current lease liabilities Total • Credit risk All of the cash and cash equivalents and other short-term financial assets as of 31 December, 2023 and 2022 were deposited with one of the major banks in Israel. Trade receivables as of 31 December 2023 and 2022 were from customers in Israel, the U.S., Europe, and Asia, which included the major customers as detailed in Note 27. The Company performs ongoing reviews of the credit worthiness of customers, the amount of credit granted to customers and the possibility of loss therefrom. The Company includes an adequate allowance for impairment losses (expected credit loss). • Trade receivables IFRS 9 provides a simplified model of recognising lifetime expected credit losses for all trade receivables as these items do not have a significant financing component. In measuring the expected credit losses, the trade receivables have been assessed by management on a collective basis as well as on a case by case basis. Trade receivables are written off when there is no reasonable expectation of recovery. Management have indicated a concern regarding the receivable from a few customers, for which a provision has been made. As at 31 December 2023, the provision for expected credit losses was $699,000 (2022: $579,000) - see Note 6 for more details. Balance at 1 January 2022 Additions Reductions Balance at 31 December 2022 Additions Reductions Balance at 31 December 2023 US dollars 230,000 589,000 (240,000) 579,000 150,000 (30,000) 699,000 Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 57 Liquidity risk The Company financed its activities from its operations, issuing shares and warrants, shareholders’ loans and short and long- term borrowings from the bank. For further details on the Company’s liquidity, refer to Note 2. All the non-current liabilities at 31 December 2023 and 2022 were lease liabilities which are serviced monthly. The short-term borrowings at 31 December 2023 and 2022 and the trade payables and other current liabilities are expected to be paid within 1 year. It is therefore not expected that the Company will encounter difficulty in meeting its obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The Company’s non-derivative financial liabilities have contractual maturities as summarized below: Short term borrowings Trade payables Other short-term liabilities Lease liabilities Total Short term borrowings Trade payables Other short-term liabilities Lease liabilities Total US dollars 31 December 2023 Within 6 months 6 to 12 months 1 to 3 years 96,306 123,711 1,033,123 163,726 1,416,866 – 1,113,402 232,783 178,265 1,524,450 – – – 764,366 764,366 US dollars 31 December 2022 Within 6 months 6 to 12 months 1 to 3 years 428,935 785,583 686,039 101,516 2,002,073 – – 228,709 105,645 334,354 – – – 467,331 467,331 2,038,446 2,038,446 More than 3 years – – – – – More than 3 years – – – 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, and balances from transactions with shareholders. The principal methods and assumptions used in calculating the estimated fair value of the financial instruments are as follows (fair value for disclosure purposes): Financial instruments included in current asset items Certain instruments (cash and cash equivalents, other short-term financial assets, trade receivables and debit balances) are of a current nature and, therefore, the balances as of 31 December, 2023 and 2022, approximate their fair value. Financial instruments included in current liability items Certain instruments (credit from banking institutions and others, trade payables and credit balances, suppliers and service providers and balances with shareholders) - in view of the current nature of such instruments, the balances as at 31 December, 2023 and 2022 approximate their fair value. Other instruments are measured at fair value through profit or loss. Annual Report and Financial Statements for the year ended 31 December 2023 58 Notes to the Financial Statements Financial instruments’ fair value movements The reconciliation of the carrying amounts of financial instruments classified within Level 3 (based on unobservable inputs) is as follows: Balance at 1 January 2022 Recognition in asset (liability) Proceeds received for shares issued Warrants exercised Fair Value at 31 December 2022 Recognition in asset (liability) Liability exchanged for shares issued Revaluation Adjustment Fair Value at 31 December 2023 US dollars Financial liabilities Liability related to share subscription agreement Warrants liability – (1,214,993) (2,000,000) 320,000 (156,555) (1,836,555) – – 1,214,993 – – (132,544) 1,778,468 58,087 – – 129,703 (2,841) Both the financial assets and the two types of financial liabilities are measured at fair value through profit and loss. Measurement of fair value of financial instruments The following valuation techniques are used for instruments categorised in Level 3: Liability related to share subscription agreement The fair value of the liability related to share subscription agreement is categorised as level 3 of the fair value hierarchy. The liability is valued by adding: • the number of shares that the Investor would receive from a unilateral exchange for his outstanding subscription amount, multiplied by the current share price of the Company, and • the outstanding subscription amount that the Company may choose to repay in cash amount. Pursuant to the February 2022 share subscription agreement, the investor has the right, at its sole discretion to require the Company to issue shares in relation to the subscription amount outstanding (or a part of it), under which, the number of shares to be issued for such settlement, shall be determined by dividing the face value of the subscription amount by the Settlement Price. The Settlement Price is equal to the sum of (i) the Reference Price and (ii) the Additional Price. The Reference Price is the average of the 3 daily volume-weighted average prices (“VWAPs”) of Shares selected by the Investor during a 15 trading day period immediately prior to the date of notice of their issue, rounded down to the next one tenth of a penny. The Additional Price is equal to half of the excess of 85% of the average of the daily VWAPs of the Shares during the 3 consecutive trading days immediately prior to the date of notice of their issue over the Reference Price. As at 31 December 2023, this liability had been extinguished - see Note 15.E.[2]. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 59 Warrants liability This liability is valued at the fair value of the £0.60 Warrants as described in detail in Note 15.E.[1]. Should the Company’s share price increase, then the warrants’ fair value will increase by a lower amount, as is inherent in the Black Scholes option pricing model. In addition, as the Company has a “put” warrant which is triggered under certain circumstances when the Company’s share price reaches £0.80, the value of the Warrants will not increase indefinitely for the 12 month period that the “put” option is in place. C. Capital management The objectives of the Company’s policy are to maintain its ability to continue operating as a going concern with a goal of providing the shareholders with a return on their investment and to maintain a beneficial equity structure with a goal of reducing the costs of capital. The Company may take different steps toward the goal of preserving or adapting its equity structure, including a return of equity to the shareholders and/or the issuance of new shares for purposes of paying debts and for purposes of continuing the research and development activity conducted by the Company. For the purpose of the Company’s capital management, capital includes the issued capital, share premium and all other equity reserves attributable to the equity holders of the Company. NOTE 27 – SEGMENT REPORTING A. 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 2023 154,700 12,390 758,445 2,852,384 3,777,919 2022 290,800 131,000 429,954 2,085,670 2,937,424 % Year ended 31 December 2023 4.1% 0.3% 20.1% 75.5% 100.0% 2022 9.9% 4.5% 14.6% 71.0% 100.0% Annual Report and Financial Statements for the year ended 31 December 2023 60 Notes to the Financial Statements Revenue from customers in the Company’s domicile, Israel, as well as its major market, the United States and Asia, have been identified on the basis of the customer’s geographical locations. The Company’s revenues from major customers as a percentage of total revenue was: Customer A Customer B Customer C Customer D Customer E % Year ended 31 December 2023 54% 19% 15% 5% 3% 96% 2022 58% 10% 8% 6% 5% 88% B. All of the Company’s non-current assets are located in the Company’s country of domicile. NOTE 28 – RELATED PARTIES A. Founders In April 2017, the employment agreement of the two founders of the Company Mr. David Levi and Mr. Shavit Baruch, was amended, in terms of which each of them, in addition to their salary, is entitled to a performance bonus of 5% of the Company’s annual profit before tax. For each year, the bonus shall be capped at $250,000 each. Such bonus is dependent on their continual employment by the Company. Shavit Baruch had an amount due to him for compensation originating in prior years. As at 31 December 2023, the Company owed him in this regard a balance of $106,683 (2022: $110,988) – see Note 13. In October 2023, David Levi, a co-founder of the Company provided a non-interest bearing loan to the Company of 1,000,000 NIS (approx. £200,000 or $250,000), This loan was approved by the court and, entitles David Levi to be repaid as a priority creditor in any event. In December 2023, David Levi subscribed for 7,500,000 shares at the same price as outside investors paid in the Company’s equity raise of £700,000 ($880,000). David Levi settled the purchase price for these shares in exchange for the satisfaction of £75,000 ($94,500) of his non-interest bearing priority loan. B. Chief Financial Officer Mark Reichenberg stepped down from the board on 31 July 2023, when his tenure as CFO terminated and the 209,000 ESOP options he held were cancelled. From August 2023, Ayala Deutsch took over the CFO duties and was formally appointed as permanent CFO in February 2024, when she was also appointed to the board of directors. Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 61 C. Remuneration of key management personal including directors for the year ended 31 December 2023 Name David Levi Mark Reichenberg (3) Shavit Baruch Chen Saft-Feiglin (4) Zohar Yinon (4) Joseph Albagli (2) Richard Bennett Position Chief Executive Officer (1) Chief Financial Officer (1) VP Research & Development (1) Non Executive Director Non Executive Director Non Executive Chairman Non Executive Director US dollars Salary and benefits Share based compensation 260,700 116,408 249,908 17,959 16,712 31,493 24,864 718,044 17,177 – 17,177 – – 18,655 – 53,009 Total 277,877 116,408 267,085 17,959 16,712 50,148 24,864 771,053 (1) Key management personnel as well as directors long-term employee benefits and termination benefits account for less than 12.5% of their salary and benefits. (2) As part of the agreed compensation, monthly shares equal to the value of £1,250 are accrued. In July 2023 - 126,347 shares accrued have been allotted. The remaining accrued shares as of year-end were allotted in March 2024, amounting to 921,152 shares. (3) Terminated employment and ended directorship on 31 July 2023. (4) Ceased to act as directors on 14 November 2023. Remuneration of key management personal including directors for the year ended 31 December 2022 Name David Levi Mark Reichenberg Shavit Baruch Chen Saft-Feiglin (1) Zohar Yinon (1) Joseph Albagli (3) Richard Bennett (1)(4) Position Chief Executive Officer (2) Chief Financial Officer (2) VP Research & Development (2) Non Executive Director Non Executive Director Non Executive Chairman Non Executive Director US dollars Salary and benefits Share based compensation 288,495 201,038 276,691 18,318 18,806 34,582 13,379 851,309 37,661 3,173 37,661 – – 18,532 – 97,027 Total 326,156 204,211 314,352 18,318 18,806 53,114 13,379 948,336 (1) Independent director. (2) Key management personnel as well as directors long-term employee benefits and termination benefits account for less than 12.5% of their salary and benefits. (3) As part of the agreed compensation, monthly shares equal to the value of £1,250 are accrued. On 14 April 2022 - 37,106 shares accrued to that date have been allotted. The remaining accrued shares as of year-end have not yet been allotted. (4) Appointed 7 April 2022. Annual Report and Financial Statements for the year ended 31 December 2023 62 Notes to the Financial Statements D. Directors’ equity interests in the Company as at 31 December 2023 Name David Levi Shavit Baruch Joseph Albagli Shares Options and warrants Direct holdings vested options Unvested options Unexercised Unexercised 6p warrants Total options and warrants 20,949,065 5,760,438 256,787 26,966,290 177,379 177,379 – 83,331 83,331 – 3,028,571 668,771 – 3,289,281 929,481 – 354,758 166,662 3,697,342 4,218,762 As set out further in note 15E, the above directors have participated in certain of the placings and the variation of the warrant instruments during the year ended 31 December 2023. Directors’ equity interests in the Company as at 31 December 2022 Name David Levi Shavit Baruch Joseph Albagli Mark Reichenberg Shares Options and warrants Direct holdings Unexercised vested options 9,587,160 5,091,667 47,106 – 14,725,933 110,710 110,710 – 175,667 397,087 Unvested options 150,000 150,000 – 33,333 333,333 Total options and warrants 260,710 260,710 – 209,000 730,420 NOTE 29 – RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES 1 January 2023 Cashflow – Repayments – Proceeds Non-cash movement – Terminations – Exchange rate differences 31 December 2023 (*) (*) Including current maturities of $341,991. Lease Liabilities Short Term Borrowings Total 2,712,938 428,935 3,141,873 (197,772) (1,543,210) (1,740,982) – 1,239,657 1,239,657 (1,324,807) (84,002) 1,106,357 – (1,324,807) (29,076) 96,306 (113,078) 1,202,663 Ethernity Networks STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 63 1 January 2022 Cashflow – Repayments – Proceeds Non-cash movement – Exchange rate differences 31 December 2022 (*) Lease Liabilities Short Term Borrowings Total 3,240,071 422,633 3,662,704 (158,849) – (493,338) 527,790 (652,187) 527,790 (368,284) 2,712,938 (28,150) 428,935 (396,434) 3,141,873 (*) Including current maturities of $207,161. For financial liabilities to be settled through issuance of ordinary shares see notes 15.E and 26B. NOTE 30 – SUBSEQUENT EVENTS 1. On 14 February 2024, Ayala Deutsch was appointed as Chief Financial Officer, together with her joining the board of directors. 2. On 16 April 2024, Aviva Banczewski and Julie Kunstler were appointed as external directors of the Company. 3. On 16 April 2024, 17,377,225 options to the following directors were approved at the General Meeting of the Company. These options have an exercise price of 1.5p, vest over three years in 12 equal portions, with 1/12 of the options vesting at the end of each quarter. Director David Levi (CEO) Shavit Baruch (VP R&D) Ayala Deutsch (CFO) Yosi Albagli (Chairman) Number of options 11,447,309 4,235,247 1,200,000 494,669 17,377,225 Annual Report and Financial Statements for the year ended 31 December 2023 Registered Office: Beit Golan, 3rd Floor 1 Golan St., Corner HaNegev Airport City 7019900 Israel