REG - Ethernity Networks - Results for the Year Ended 31 December 2022
30/06/2023 07:00
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RNS Number : 4575E Ethernity Networks Ltd 30 June 2023
30 June 2023
Ethernity Networks Ltd.
("Ethernity" or the "Company")
Results for the Year Ended 31 December 2022
Ethernity Networks Ltd (AIM: ENET.L), a leading supplier of data processing
semiconductor technology for networking appliances, today announces its
audited results for the year ended 31 December 2022.
Financial Highlights
· Revenues increased by 11.5% to $2.94m (2021: $2.64m)
· Gross margins declined by 17.82% to $ 1.6m (2021: $1.9m)
· Gross Margin percentage declined to 54.41% (2021: 73.80%)
· Operating costs before amortisation of intangible assets,
depreciation charges, provisions and other non-operational charges increased
by 15.5% to $8.0m (2021: $6.9m)
· EBITDA Loss increased by 27.6% to a loss of $ 6.4m (2021: $5.05m)
· Cash funds raised during the year of ~$2m before costs (2021:
~$11.2m)
Operational Highlights
· The Company's sales of its DPU SoC increased by 200% with the
majority being the shipment of the ENET DPU SoC to its U.S. fixed wireless
system provider customer, with 2023 orders remaining on track for supply, and
an increased forecast from the customer for 2024;
· the Company signed a contract for a second-generation platform, based
on a scaled-up version of the Company's DPU SoC offering, with its U.S. fixed
wireless OEM customer;
· the Company progressed with the delivery of the $3 million GPON and
XGS-PON OLT SoC contract for its Chinese/Indian OEM, and is now progressing
with the customer for deployment;
· the Company signed a follow-on contract of $4.6 million with that
customer for delivery of a PON device for Fiber-to-the-Room deployment;
· the Company delivered a UEP2025 for testing and integration with an
existing prominent microwave wireless OEM customer and is working with the
customer on joint go-to-market plans.
Post-period Highlights
· First release of the UEP bonding product provided to our existing
Bonding OEM customer, with the customer planning to commence field trials
during Q3 2023 and initiate deployment during Q4 2023.
· The Asian vendor's XGS-PON OLT platform, that embeds Ethernity's
XGSPON MAC FPGA SoC, plans to commence deployment during this year.
· The FTTR gateway was completed, however we expect delays in
deployment by the customer, due to the customer's own constraints, therefore
FTTR revenues for the current year from the customer are uncertain.
· The Company built a new plan for a two layer PON solution that
utilizes the FTTR platform with more functionality and at a higher price to
serve high-rise buildings such as Multi-Dwelling-Units (MDUs).
· Received a purchase order for $1.5 million from its existing fixed
wireless customer to supply the Company's data processing system-on-chip (SoC)
in staged deliveries during Q3 2023.
· The Company is in discussions regarding the licensing of its PON
technology with other potential vendors.
David Levi, Chief Executive, said "While it is a challenging period due to the
world financial situation, I am encouraged by the fact that there is demand
for our PON offerings that have captured interest from larger corporations,
and I am hopeful that, with the cost reductions implemented and the modified
business plan, engagement in multiple design wins for our PON technology will
fulfil our further anticipated growth."
Re-Election of Directors
In accordance with the Company's Articles of Association, the Company's
Directors serve for a period of three years. In terms of the General Meeting
of the Company held on 22 June 2020, the term of David Levi and Shavit Baruch,
in their capacity as directors, had been extended until 22 June 2023, the term
of Mark Reichenberg in his capacity as director, had been extended until 28
June 2023.
The re-election of Messrs. Levi, Baruch and Reichenberg as directors for a
further three years was approved by the Board of Directors on 29 June 2023 and
are to be ratified at the Company's 2023 annual general meeting ("AGM").
Posting of Annual Report
The annual report and accounts for the year ended 31 December 2022 is being
posted to shareholders shortly and will be available on the Company's website
at www.ethernitynet.com (http://www.ethernitynet.com) . The notice of annual
general meeting will be despatched in due course.
For further information, please contact:
Ethernity Networks Ltd Tel: +972 8 915 0392
David Levi, Chief Executive Officer
Mark Reichenberg, Chief Financial Officer
Allenby Capital Limited (Nominated Adviser and Joint Broker) Tel: +44 (0)20 3328 5656
James Reeve / Piers Shimwell (Corporate Finance)
Amrit Nahal / Stefano Aquilino (Sales and Corporate Broking)
Peterhouse Capital Limited (Joint Broker) Tel: +44 (0)20 7562 0930
Lucy Williams / Duncan Vasey / Eran Zucker
About Ethernity (www.ethernitynet.com (http://www.ethernitynet.com) )
Ethernity Networks (AIM: ENET.L OTCQB: ENETF) provides innovative,
comprehensive networking and security solutions on programmable hardware that
increase telco/cloud network infrastructure capacity. Ethernity's
semiconductor logic offers data processing functionality for different
networking applications, innovative 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 facilitating the deployment of
5G over wireless and fibre infrastructure.
Chairman's Statement
I am pleased to present my report as Chairman of the Board.
Since my appointment as Chair on 10 March 2021, I have spent considerable time
with the CEO and members of the Board and management both inside and outside
of formal meetings so as to fully understand the Company's strategy, the
challenges and the current dynamic environment in which the Company operates.
I believe that the general strategic direction the Company has taken was in
line with the market direction in the past year. The continued level of
interest and engagement with more significant market players was proof to me
that the strategic direction of the Company was the right one.
2022 was not without its challenges for Ethernity, and while the Company
continued with its strategic direction, the remaining impacts of COVID-19, the
components shortage, the instability in the world stock markets and the world
financial economic inflation and uncertainty had an effect on planned
deliveries during the year, resulting in revenue delays. Revenue increased by
11.46% for the 2022 financial year to $2.94 million (FY 2021 $2.63 million),
while gross margin for the year was $1.60 million (2021 $1.94 million) and an
operating loss of $8.70 million (2021 $6.32 million). This is further expanded
upon in the Financial Report section of the Annual Report.
Outlook
The first six months of the current year have presented unexpected challenges,
due to delays in expected orders from existing customers. As a result, the
Company was required to undertake a placing in May 2023 to provide short term
working capital, and has taken several steps to reduce cash burn, including
cuts to resources. The Company is also changing its business model to meet the
current situation, as described by the CEO in his report. Notwithstanding the
challenging market conditions, positive progress has been made in the current
year with a number of customer engagements, as recently demonstrated by our
$1.5 million order from our existing fixed wireless customer.
Yosi Albagli
Chairman
30 June 2023
Chief Executive's Statement
During 2021 and 2022, Ethernity Networks enjoyed very active years in
contracts signed and market acceptance of our product and solutions offerings,
as evidenced by the major growth in sales of our DPU SoC during 2022 resulting
in an increase in FPGA product sales of 200%. Yet, on the other hand, the
Company faced new challenges due to the world wide component shortage,
especially as the Company had planned to introduce its complete system
product to the market, which required tight supply chain management.
During the year under review, the Company continued its main focus of
delivering complete solutions, including network operating systems, and
hardware. We further continued development of our ENET 5200 FPGA
System-on-Chip (SoC) Quad XGS-PON OLT devices as per the $3 million contract
with an Asian broadband network OEM, first announced on 18 October 2021, which
will enable two types of PON (XGS-PON and GPON) for use in the OEM's 5G
fronthaul products, as well as other fiber access deployments, which resulted
in a follow on $4.6 million contract for Fiber-To-The-Room FPGA SoC Device
(announced on 20 September 2022).
The Company continued the UEP system product development targeting the
estimated $2 billion cell site router market, where over and above the regular
cell site routing functions, the UEP differentiates itself by embedding the
Company's patented link bonding to allow transmission of higher speed
throughput over multiple wireless connections. In March 2023, the Company
announced the delivery of the first release of the product to an existing
microwave OEM customer, who plans commencing field trials during Q3 2023, with
the initiation of deployment production targeted in Q4 2023.
Further to this, following on from the successful rollout of our DPU SoC
delivered for the Company's American fixed wireless broadband solution
customer, the customer signed a further $340k contract to adapt Ethernity's
solution for the customer's first-generation product with extended performance
into a second-generation product.
Ethernity operates and sells its product through OEMs, and its Radio Access
Network offering includes a mix of FPGA SoCs embedding our ENET network flow
processor switch/router data plane, which is deployed in our OEMs' products,
FPGA SmartNIC for Fronthaul aggregation, vRouter offload, Central Unit Data
Plane offload and UPF data plane offload, and a cell site gateway appliance
under the Universal Edge Platform (UEP) product family.
Over the last decade, the Company ENET DPU SoC devices have been deployed into
850,000 systems over more than 20 different platforms, with different
solutions and configurations into Ethernet access devices, broadband access,
aggregation platforms, wireless access, cellular base stations and the
aviation market.
The Company has built extensive knowledge in the wireless and cellular market,
and over the last decade signed multiple licensing contracts for use of our
ENET Flow Processor IP with vendors developing products and systems. The
Company has delivered thousands of FPGA SoCs into this market, including fixed
wireless systems (proprietary and LTE) base stations, point-to-point microwave
systems and 4(th) gen LTE EPC data plane. All of which are the backbone of our
current 5G offering, with many of today's OEMs that serve fixed wireless and
wireless backhaul embedding Ethernity's offering in their platforms.
Current Trading
During the first half of 2023, we continued to progress with releases of our
new products including 10G and GPON intellectual property ported on FPGA, and
the release of the UEP bonding product.
Notably to date in 2023, the following has been achieved:
· First release of the UEP bonding product provided to our existing
Bonding OEM customer, with the customer planning to commence field trials
during Q3 2023 and initiate deployment during Q4 2023, followed by mass
deployment during 2024.
· The Asian vendor's XGS-PON OLT platform, that embeds Ethernity's XGSPON
MAC FPGA SoC, plans to commence deployment during this year.
· The FTTR gateway was completed, however we expect delays in deployment
by the customer, due to the customer's own constraints, therefore FTTR
revenues for the current year from the customer are uncertain.
· The Company built a new plan for a two layer PON solution that utilizes
the FTTR platform with more functionality and at a higher price to serve
high-rise buildings such as Multi-Dwelling-Units (MDUs).
· Received a purchase order for $1.5 million from its existing fixed
wireless customer to supply the Company's data processing system-on-chip (SoC)
in staged deliveries during Q3 2023.
· The Company is in discussions regarding the licensing of its PON
technology with other potential vendors.
Outlook
The discounted fundraising undertaken in May 2023 resulted in the Company
modifying its business both in terms of costs and the revenue model, to
progress the Company towards generating positive cash flows from operations in
the latter half of 2023 without requiring the need for further funding, as it
has proven difficult under current market conditions to raise funds at a fair
value representing the underlying IP and signed contracts. We appreciate that
raising funds under such conditions may impair existing shareholder value.
With that in mind it was decided to take careful steps towards generating
positive cash flow from operations during FY2023, which will include a
combination of a modified business model, a reduction in costs, combined with
the anticipated growth in licensing sales.
The PON technology business model will be converted into a licensing model
that will position the Company to generate 100% gross margin on the licensing
revenues and, together with the cost reductions being implemented within the
development area, it is anticipated to reduce resource costs by 35%. Once
these plans are implemented, the Company anticipates it will be sufficiently
funded to allow it to generate further growth business for the UEP 2025 with
link bonding.
While it is a challenging period due to the world financial situation, I am
encouraged by the fact that there is demand for our PON offerings that have
captured interest from larger corporations, and I am hopeful to engage in
multiple design wins for our PON technology, that will fulfil our further
anticipated growth during 2024.
David Levi
Chief Executive Officer
30 June 2023
Financial Review
Financial Performance
Through the past financial year we continued to progress our current strategy
of becoming a supplier of customised and differentiated solutions and
technology. The Company has made significant progress during 2022 in the
commercialisation of its Data Processing Unit (DPU) System-on-Chip (SoC)
devices with a 200% growth over 2021 and the development of the Passive
Optical Networks (PON) SoC devices which has been proven in the
accomplishments, engagements, contracts and progress over the past year.
During 2022, the following highlights were achieved that are expected to
support revenue growth in 2023 and onward:
• The Company's sales of its DPU SoC increased by 200% with the
majority being the shipment of the ENET DPU SoC to its U.S. fixed wireless
system provider customer, with 2023 orders remaining on track for supply, and
an increased forecast from the customer for 2024;
• the Company signed a contract for a second-generation platform,
based on a scaled-up version of the Company's DPU SoC offering, with its U.S.
fixed wireless OEM customer;
• the Company progressed with the delivery of the $3 million GPON and
XGS-PON OLT SoC contract for its Chinese/Indian OEM, and is now progressing
with the customer for deployment;
• the Company signed a follow-on contract of $4.6 million with that
customer for delivery of a PON device for Fiber-to-the-Room deployment;
• the Company delivered a UEP2025 for testing and integration with an
existing prominent microwave wireless OEM customer and is working with the
customer on joint go-to-market plans.
The knock-on effect of COVID-19 pandemic continued to create challenges in
aligning ourselves with the issues within the markets in which we operate, and
our customers goals. Planned deliveries were affected, which was specifically
caused by the worldwide components shortage during the year and the supply of
components in all marketplaces continues to be an issue. Whilst the Company
took immediate steps to secure components needed for delivery on its order
commitments for its 2022 deliveries, the impact was also felt by our customers
and suppliers who inevitably pushed out their planned deliveries. This did
impact on the realisation of planned revenues for 2022, resulting in
approximately $0.6 million of revenue delays for the remainder of the 2022
year as a result of delays in projects resulting from component shortages, and
certain customers informing the Company that they were not ready to receive
milestone deliveries as had previously been anticipated.
Highlights
· Revenues increased by 11.5% to $2.94m (2021: $2.64m)
· Gross margins declined by 17.82% to $ 1.60m (2021: $1.94m)
· Gross Margin percentage declined to 54.41% (2021: 73.80%)
· Operating costs before amortisation of intangible assets, depreciation
charges, provisions and other non-operational charges increased by 15.5% to
$8.0m (2021: $6.9m)
· EBITDA Loss increased by 29.27% to a loss of $ 6.4m (2021: loss of $
4.98m)
· Cash funds raised during the year of ~$2m before costs (2021: ~$11.2m)
Key financial results
Recognition of Research and Development Costs.
In line with the change in policy adopted by the Company from 1 July 2019 the
Company continues with the policy of no longer continuing to recognise the
Research and Development costs as an intangible asset but recognising these as
an expense and charged against income in the year incurred.
For the years ending 31 December 2020 and 2021 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, 31 December 2022, and the assertion that the
underlying value of the intangible asset exceeds the carrying value on the
balance sheet remains unchanged.
EBITDA
EBITDA, albeit it not a recognised reportable accounting measure, provides a
meaningful insight into the operations of a company when removing the non-cash
or intangible asset elements from trading results along with recognising
actual costs versus some IFRS adjustments, in this case being the amortisation
and non-cash items charges in operating income and the effects of IFRS 16
treatment of operational leases.
The EBITDA for the financial year ended 31 December 2022 is presented as
follows:
EBITDA US Dollar Increase %
(Decrease)
For the year ended
31 December
2022 2021
Revenues 2,937,424 2,635,420 302,004 11.46%
Gross Margin as presented 1,598,328 1,944,903 -346,575 -17.82%
Gross Margin % 54.41% 73.80% 0
Operating (Loss) as presented -8,117,844 -6,327,475 -1,790,369 28.30%
Adjusted for:
Add back Amortisation of Intangible Assets 961,380 961,380 0 0%
Add back Share based compensation charges 221,362 77,583 143,779 185.32%
Add back vacation accrual charges 35,646 -27,519 63,165 -229.53%
Add back impairments 599,200 80,000 519,200 649.00%
Add back depreciation charges on fixed assets 108,581 86,168 21,087 26.01%
Add back IFRS operating leases depreciation 339,561 173,675 165,886 95.52%
EBITDA -6,431,146 -4,976,188 -1,454,958 29.24%
The EBITDA losses increased during the 2022 year from $4.98 million in 2021 to
$6.43 million in 2022. The increase in the EBITDA losses were driven mainly by
increases in Research and Development costs of $1.07m which arose largely as a
result of staff resources being increased for the new product developments
during the 2022 financial year. Increases in General and Administrative costs
of $236,000 before IFRS fixed assets and lease depreciation derived mainly
from increases in property costs and the increase in listed company fees and
costs. Marketing and Sales expenses increased slightly by $123,000 as
marketing activities abroad increased as trade shows and conferences re-opened
subsequent to COVID-19.
These EBITDA losses are anticipated to start reducing during the latter half
of 2023 as the future gross margins and margin percentages increase based on
the revised business model are realised.
Summarised trading results
Summarised Trading Results US Dollar Increase %
(Decrease)
Audited
For the year ended
31 December
2022 2021
Revenues 2,937,424 2,635,420 302,004 11.46%
Gross Margin 1,598,328 1,944,903 -346,575 -17.82%
Gross Margin % 54.41% 73.80%
Operating (Loss) -8,696,876 -6,327,475 -2,369,401 37.45%
Financing costs -573,388 -3,074,452 2,501,064 -81.35%
Financing income 1,267,652 228,404 1,039,248 455.00%
(Loss) before tax -8,002,612 -9,173,523 1,170,911 -12.76%
Tax benefit (reversal of previous deferred tax benefit) 0 -186,772 186,772 -100.00%
Net comprehensive (loss) for the year -8,002,612 -9,360,295 1,357,683 -14.50%
The operating loss before finance charges and after IFRS adjustments increased
by $2.40 million over 2021, attributable mainly as explained above to the
increase in R&D costs, asset impairments and a lower gross margin
percentage. The effect of the finance costs and incomes, which resulted in the
Comprehensive loss for the year reducing by $1.36 million over 2021, are based
on IFRS recognition, and not a cash cost, are expanded on further in this
report.
Revenue Analysis
Revenues for the twelve months ended 31 December 2022 increased by 11.5% to
$2.94 million (2021: $2.64 million) after additional year end IFRS adjustments
and deferrals of approximately $600,000 in revenues to 2023 as outlined above.
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 IP licenses and services based on the revised business model as
presented in the CEO report.
Margins
The gross margin percentage reduced to 54.4% in 2022 from 73.8% in 2021,
related mainly to increased component costs incurred in securing components
for deliveries. The gross margin will vary according to the revenue mix as IP
Licensing, Royalty and Design Win revenues generally achieve an approximate
100% gross margin before any sales commissions are accounted for.
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:
Operating Costs US Dollar Increase %
(Decrease)
For the year ended
31 December
2022 2021
Total R&D Expenses 6,618,795 5,550,912 1,067,883 19.24%
R&D Intangible amortisation -961,380 -961,380
Vacation accrual expenses -21,700 33,921 -55,621 -163.97%
Share Based Compensation IFRS adjustment -160,134 -54,962 -105,172 191.35%
Research and Development Costs net of amortisation, Share Based Compensation, 5,475,581 4,568,491 907,090 19.86%
IFRS adjustments and Vacation accruals
Total G&A Expenses 2,523,916 1,721,873 802,043 46.58%
Share Based Compensation IFRS adjustment -51,627 -10,750 -40,877 380.25%
Vacation accrual expenses -3,189 2,181 -5,370 -246.22%
Impairment losses of financial assets -599,200 -80,000 -519,200 649.00%
Fixed Assets Depreciation Expense -108,581 -86,168 -21,087 24.08%
Depreciation Leases IFRS16 -339,561 -173,675 -165,886 95.52%
General and Administrative expenses, net of depreciation, Share Based 1,421,758 1,373,461 48,297 3.62%
Compensation, IFRS adjustments, Vacation accruals and impairments.
Total Marketing Expenses 1,167,534 1,044,905 122,629 11.74%
Share Based Compensation IFRS adjustment -9,601 -11,871 2,270 -19.12%
Vacation accrual expenses -10,757 -8,583 -2,174 25.33%
Marketing expenses, net of Share Based Compensation and Vacation accruals. 1,147,176 1,024,451 122,725 11.98%
Total 8,044,423 6,964,985 1,079,438 15.50%
Research and Development costs after reducing the costs for the amortisation
of the capitalised Research and Development intangible asset, depreciation,
share based compensation and vacation accruals increased by $907,090 against
2021. These increases were mainly attributable to the increase in the basic
payroll component as planned of approximately $873,000 over 2021.
The increase in General and Administrative costs over 2021 to $1,421,666 after
adjusting for depreciation, share based compensation, IFRS adjustments,
impairments and vacation accruals amounted to approximately 3.62% or $49,623.
A portion of this increase of $31,800 resulted mainly from the increase in
fees and costs for UK Brokers/Nominated Advisers due to the Company's previous
Nominated Adviser foregoing their license in April 2022 with duplicated fees
being paid in Q1 and Q2 of 2022. There were increases in payroll costs of
$44,495, with other increases in costs offset by other savings. By the very
nature of expenditure accounted for under the General and Administrative costs
there remains little scope for further savings due to the fixed nature of such
expenses.
Following the significant decline in Sales and Marketing costs during the 2020
financial year due to cessation of many marketing travel and travel related
activities as a result of the COVID-19 pandemic and the further modest
decrease in 2021 over 2020 of $27,931, Sales and Marketing costs increased
marginally from 2021 by $122,725. This increase resulted mainly from increased
marketing activity and attendance at market events of approximately $95,000
while the return to 100% payroll and related costs accounted for an increase
of approximately $26,000.
Financing Costs
The continued material levels of financing costs and finance income has come
about due to the continued recognition and realization of funds inflows,
outflows and IFRS valuations of the $2 million Subscription Agreement entered
into with the 5G Innovation Leaders Fund LLC on the 25 February 2022 referred
to below and under the section "Balance Sheet" along with the further finance
effects of the over-subscribed Placing and Broker option along with the
corresponding warrants issued in September 2021.
It is to be noted that the transactions detailed below, although they are in
essence based on raising funds via equity issues, are nonstandard equity
arrangements and have been dealt with in terms of the guidance in
IFRS9-Financial Instruments. This guidance, which is significantly complex in
its application, forces the recognition of the fair value of the equity
issues, and essentially creating a recognition in differences between the
market price of the shares issued at the time of issue versus the actual price
the equity is allotted at. It is this differential or "derivative style
instrument" that needs to be subject to a fair value analysis, and the
instruments, the values received and outstanding values due being separated
into equity, assets, finance income and finance charges in terms of the IFRS-9
guidance.
Referring to the fundraise deals the Company completed during the year of 2021
and further in 2022 being;
a. The resulting issue of warrants at 60p (60p Warrants) from the
over-subscribed Placing and Subscription to raise £4.2 million, from the 27th
to 29th of September 2021. It is to be noted that these Warrants were not
exercised and lapsed on 4 April 2023.
b. The Share Subscription Agreement with the 5G Innovation Leaders Fund LLC
of $2 million entered into on 25 February 2022.
It has been determined that in terms of IFRS-9, all the transactions are to be
recognised as equity and a liability of the Company and all adjustments to the
liability value are to be recognised through the Income Statement. In all
cases the equity differential based on allotment price and fair value at time
of allotment is charged to the income statement. The liability in respect of
deal a. above represents the outstanding 60p Warrants which have not been
exercised as of 31 December 2022, however these expired on 4 April 2023 and at
the year ended 31 December 2022 had a fair value of nil.
The above outlined treatment results in the finance expense charged to the
Income Statement, however it should be noted that the expense is not an actual
cash expense.
The Finance income $1,214,993 relates to the fair valuation adjustment to the
60p Warrants referred to above having been reduced to nil and the previous
liability relating thereto being reduced to nil. As stated above, any
adjustments to the liabilities are taken through the income statement, however
these are non-cash adjustments.
The Financing Expenses and Finance Income in the Income Statement are thus
summarised as follows:
Financing expenses for the full year ended December 31 2022
The Company completed a $2 million Subscription Agreement with the 5G
Innovation Leaders Fund LLC on the 25 February 2022.
5G Innovation Leaders Fund $60,000 Face value premium of $60,000 on $2,000,000 funded to the Company in February
2022
$74,437 Adjustment to fair value of $320,000 settled portion in October 2022
$96,555 Adjustment to fair value of remaining unsettled share subscription agreement
as at December 31 2022
Total 5G Fund $230,992
Financing Income for the full year ended December 31 2022
Peterhouse Capital $1,214,993 Reversal of prior valuation of 60p Warrants issued
September 2021 placing
Operating Loss and Net Comprehensive Loss for the Year
Whilst a portion of the revenues have been deferred from 2022 to 2023 due to
the worldwide components shortage as previously noted, the operating loss
before financing expenses and the effect of the equity transactions was in
line with expectations.
Balance Sheet
During the year under review, the Company strengthened its balance sheet via
the $2 million Share Subscription Agreement entered into with the 5G
Innovation Leaders Fund LLC ("5G Fund"), a U.S.-based specialist investor in
February 2022.
Furthermore, there have been other changes on balance sheet items as follows:
· Increases in trade receivables reflect the activity in the second half
of the financial year from the announced contracts.
· Inventories increased almost threefold, as a result of procurement of
components inventory due to the worldwide component shortage.
· Intangible assets continue to reduce in carrying value due to the
amortisation policy with an estimated 5.5 years of amortisation remaining.
· Trade payables increased by approximately $134,000 over 2021 due to
advance purchasing of components for delivery commitments in the latter
portion of the reporting year and 2023.
· Resulting from the funding received on the 5G Fund agreement the
liability on the convertible share subscription, including IFRS adjustments
increased from $0 at 31 December 2021 to $1,820,181 at 31 December 2022. The
difference between the amount per the balance sheet and the face value of the
$1,740,000 unconverted liability at 31 December of $80,181 represents the IFRS
valuation differential of the liability at year end. This additional amount
does not however add to the face value of the liability for settlement
purposes, but rather is extinguished on the settlement and closure of the
instrument.
· Other liabilities represent in the main the accrual of payroll and the
related costs, short term portion of the lease liability and other accrued
expenses at year end.
The balance sheet quick and current ratios of the Company for 2022, excluding
the "liabilities" relating to the Share Subscription Agreement and Warrants,
reduced to 1.59 and 1.26 respectively (2021 4.20 and 4.07 respectively). This
change is due to the reduction of cash reserves at year end 31 December 2022
effecting both the quick and current ratios, while the increase in inventories
contributed further to the decline in the quick ratio.
The net cash utilised and cash reserves are carefully monitored by the Board.
Cash utilised in operating activities for the year is $8,333,302 (2021
$5,386,653), the increase in consumption being mainly related to the increases
in return to post COVID-19 operating levels, inventories and trade
receivables. Gross cash reserves remained positive at $715,815 as of 31
December 2022, which have been bolstered by the fundraising activities carried
out during January and May of 2023.
Short term borrowings of $428,935 (2021 $422,633) arose mainly from trade
financing facilities via the Company's bankers. This is a "rolling facility"
and utilised by the Company on specific customer transactions only.
The Intangible Asset on the Balance Sheet at a carrying value of $5,462,800
(2021: $6,424,180) is a result of the Company having adopted from 2015, the
provisions of IAS38 relating to the recognition of Development Expenses, which
methodology as noted in the 2019 Annual Report was ceased from 1 July 2019.
The useful life and the amortisation method of each of the intangible assets
with finite lives are reviewed at least at each financial year end. If the
expected useful life of an asset differs from the previous estimate, the
amortisation period is changed accordingly. Such change is accounted for as a
change in accounting estimate in accordance with IAS 8. For the year ended 31
December 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.
The Right-of-use asset under Non-current assets and the corresponding Lease
liability under Non-current liabilities on the balance sheet and as referred
to in Note 11 of the financial statements arises in terms of IFRS 16 which
became effective from 1 January 2019. This accounting treatment relates to the
recognition of the operating leases of the company premises, and immaterially
to leased company vehicles. In terms of the applicable Standard, the Company
is required to recognise the "benefit" of such operational leases as it enjoys
the rights and benefits as if it had ownership thereof. Correspondingly, in
terms of the Standard, the liability relating to the future payments under
such operating leases is required to be recognised. The accounting treatment,
simply put, then results in an amortisation of the asset over the period of
the operating lease as a charge to income, and payments made are charged as a
reduction against the liability, essentially offsetting each other to zero.
The liability is not an "amount due" for repayment in full as a singular
payment at any one time, and both the asset and liability have no impact on
planned and actual cash flows as the real cash flow is the normal monthly
instalments for premises rentals and car leases paid in the normal course of
business as part of planned expenditures in cash flows.
The asset and liability referred to above in respect of the Company premises
is material in that it represents the remainder of the 5 year lease commitment
plus the 5 year renewal option that the Company has the right to and benefit
of.
Summary of Fundraising Transactions Liabilities in terms of IFRS Recognition
At year end, the remaining $1,740,000 face value of the $2,000,000 of the
funding initiated in February 2022 relating to the 5G Fund is recognised in
the balance sheet.
The issue of the 60p Warrants in the September 2021 Share placing created a
liability as explained above in terms of IFRS recognition principles. This
liability reverses to equity once the warrants are exercised.
As of 31 December 2022, the liability in terms of the financing transaction
entered into during the 2022 financial year is:
Liability as at 31 December 2022
5G Innovation Leaders Fund $1,836,555 Remaining liability to 5G representing fair value of the shares not yet called
for allocation of the $2,000,000 share subscription funded in February 2022.
The face value of the outstanding amount at 31 December 2022 is $1,740,000
against which future allotments of shares will be made. The differential of
$96,555 fair value adjustment is recognised under the requirements of IFRS as
a finance cost, no shares are allotted against this, nor is cash paid out for
this.
$1,836,555
Subsequent Financial Events
Subsequent to the financial year end, the Company completed fundraising
transactions as follows:
a. On 17 to 19 January 2023, the Company completed a Placing and the
Broker Option raising a gross amount of million £1.65 million (before
expenses).
This included investors in the Placing receiving one warrant for every placing
share subscribed for, exercisable at a price of 15p per share. These warrants
will be exercisable for a period of 24 months from the date of grant.
In terms of the Placing and Broker Option, and under the authorities granted
to the directors at the EGM of 9 February 2023, Company has granted 23,571,430
warrants to investors in the Placing and Broker Option.
The warrants contain an accelerator clause such that the Company may serve
notice ("Notice") on the Warrant holders to exercise their Warrants in the
event that the closing mid-market share price of the Company's Ordinary Shares
trade at 20p or more over a consecutive five-day trading period from date of
Admission. In the event the Company serves Notice, any Warrants remaining
unexercised after seven calendar days following the issue of the Notice will
be cancelled.
b. On 11 to 12 May 2023, the Company completed a further Placing,
Subscription and Broker Option raising a gross amount of £783,500 (before
expenses).
c. On 25 May 2023, the Company announced a variation of the exercise price
of the warrant instruments that were granted in connection with the fundraise
undertaken by the Company in January 2023 as per a. above.
The initial 15p exercise price of the Warrants represented a premium of over
400% to the closing midmarket price of an Ordinary Share on 24 May 2023. The
Directors considered therefore that it would be appropriate to amend the
exercise price of the Warrants to a level that is more attractive to Warrant
holders and which would still provide meaningful funding to the Company should
the Warrants be exercised in full.
The Company therefore on 24 May 2023, varied the exercise price of the
23,571,430 Warrants from 15p to 6p per new ordinary share in the Company,
representing a 107% premium to the closing mid-market price of an Ordinary
Share on 24 May 2023. In addition, the accelerator clause as noted under a.
above, was varied from 20p to 7.5p, applicable on the same basis as outlined
above.
All of the terms of the Warrants remain unchanged and as announced on 17
January 2023. The expiry date of the Warrants remains as 8 February 2025.
COVID-19 Impact and Going Concern
Currently, with the impact of COVID-19 worldwide reduced significantly the
Company has continued its planned strategies. With the still ongoing worldwide
components shortage we remain acutely aware of the risk of an impact in delays
in the timing of revenues and cash inflows, as well as delays in supplies not
only to the Company but its customers, whose product deployment could be
materially impacted.
In the presentation of the annual financial statements for the year ended 31
December 2022, 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.
Other than the points outlined above, there are no items on the Balance Sheet
that warrant further discussion outside of the disclosures made in the Annual
Financial statements of the Annual Report.
Mark Reichenberg
Chief Financial Officer
30 June 2023
STATEMENTS OF FINANCIAL POSITION
US dollars
31 December
Notes 2022 2021
ASSETS
Current
Cash 5 715,815 7,060,824
Trade receivables 6 1,299,072 1,545,598
Inventories 7 773,076 284,810
Other current assets 8 343,872 240,964
Current assets 3,131,835 9,132,196
Non-Current
Property and equipment 9 810,326 660,069
Intangible asset 10 5,462,800 6,424,180
Right -of -use asset 11 2,816,641 3,156,202
Other long term assets 35,689 38,956
Non-current assets 9,125,456 10,279,407
Total assets 12,257,291 19,411,603
LIABILITIES AND EQUITY
Current
Short Term Borrowings 12 428,935 422,633
Trade payables 785,583 651,758
Liability related to share subscription agreement 15.F. 3 1,836,555 -
Warrants liability 15.F. 2 - 1,214,993
Other current liabilities 11,13 1,121,909 1,097,359
Current liabilities 4,172,982 3,386,743
Non-Current
Lease liability 11 2,505,777 3,069,721
Non-current liabilities 2,505,777 3,069,721
Total liabilities 6,678,759 6,456,464
Equity 15
Share capital 21,904 21,140
Share premium 40,786,623 40,382,744
Other components of equity 1,225,391 1,004,029
Accumulated deficit (36,455,386) (28,452,774)
Total equity 5,578,532 12,955,139
Total liabilities and equity 12,257,291 19,411,603
The accompanying notes are an integral part of the financial statements.
STATEMENTS OF COMPREHENSIVE LOSS
US dollars
For the year ended
31 December
Notes 2022 2021
Revenue 17,27 2,937,424 2,635,420
Cost of sales 1,339,096 690,517
Gross margin 1,598,328 1,944,903
Research and development expenses 18 6,618,795 5,550,912
General and administrative expenses 19 2,523,916 1,721,873
Marketing expenses 20 1,167,534 1,044,905
Other income 21 (15,041) (45,312)
Operating loss (8,696,876) (6,327,475)
Financing costs 22 (573,388) (3,074,452)
Financing income 23 1,267,652 228,404
Loss before tax (8,002,612) (9,173,523)
Tax expense 24 - (186,772)
Net comprehensive loss for the year (8,002,612) (9,360,295)
Basic and diluted loss per ordinary share 25 (0.11) (0.14)
Weighted average number of ordinary shares for basic loss per share 76,013,296 67,492,412
The accompanying notes are an integral part of the financial statements.
STATEMENTS OF CHANGES IN EQUITY
Notes Number of Share Share Other components Accumulated Total
shares Capital premium of equity deficit equity
Balance at 1 January 2021 47,468,497 12,495 27,197,792 813,256 (19,092,479) 8,931,064
Employee share-based compensation - - - 77,583 - 77,583
Exercise of employee options 15.F. 1 706,667 220 70,893 - - 71,113
Net proceeds allocated to the issuance of ordinary shares 15.F. 2 13,149,943 4,053 4,280,265 - - 4,284,318
Exercise of warrants 15.F. 2 3,500,010 1,072 2,007,606 - - 2,008,678
Shares issued pursuant to share subscription agreement 15.F. 3 10,221,621 3,204 6,742,848 - - 6,746,052
Expenses paid in shares and warrants 15.F. 5 305,000 96 83,340 113,190 - 196,626
Net comprehensive loss for the year - - - - (9,360,295) (9,360,295)
Balance at 31 December 2021 75,351,738 21,140 40,382,744 1,004,029 (28,452,774) 12,955,139
Employee share-based compensation - - - 221,362 - 221,362
Exercise of employee options 15.F. 1 - - - - - -
Shares issued pursuant to share subscription agreement 15.F. 3 2,695,593 752 383,733 - - 384,485
Expenses paid in shares and warrants 15.F. 5 37,106 12 20,146 - - 20,158
Net comprehensive loss for the year - - - - (8,002,612) (8,002,612)
Balance at 31 December 2022 78,084,437 21,904 40,786,623 1,225,391 (36,455,386) 5,578,532
STATEMENTS OF CASH FLOWS
US dollars
For the year ended 31 December
2022 2021
Operating activities
Net comprehensive loss for the year (8,002,612) (9,360,295)
Non-cash adjustments
Depreciation of property and equipment 108,581 86,168
Depreciation of right of use asset 339,561 173,675
Share-based compensation 221,362 77,583
Amortisation of intangible assets 961,380 961,380
Amortisation of liabilities (396,434) 39,042
Deferred tax expenses - 186,772
Foreign exchange losses on cash balances 381,480 30,214
Capital Loss - 70
Income from change of lease terms - (8,929)
Revaluation of financial instruments, net (984,001) 2,691,145
Expenses paid in shares and options 20,158 196,626
Net changes in working capital
Decrease (Increase) in trade receivables 246,526 (767,537)
Increase in inventories (488,266) (111,316)
Increase (decrease) in other current assets (102,908) 84,068
Increase (decrease) in other long-term assets 3,267 (2,831)
Increase in trade payables 133,825 361,583
Decrease in other liabilities (12,261) (24,071)
Net cash used in operating activities (7,570,342) (5,386,653)
Investing activities
Deposits to other long-term financial assets - (28,618)
Purchase of property and equipment (258,838) (194,195)
Net cash provided (used) by investing activities (258,838) (222,813)
Financing activities
Proceeds from share subscription agreement 2,000,000 3,177,306
Proceeds allocated to ordinary shares - 5,016,494
Proceeds allocated to warrants - 1,472,561
Issuance costs (9,952) (390,398)
Proceeds from exercise of warrants and options - 1,367,388
Proceeds from short term borrowings 527,790 900,192
Repayment of short-term borrowings (493,338) (887,585)
Repayment of lease liability (158,849) (136,180)
Net cash provided by financing activities 1,865,651 10,519,778
Net change in cash (5,963,529) 4,910,312
Cash beginning of year 7,060,824 2,180,726
Exchange differences on cash (381,480) (30,214)
Cash end of year 715,815 7,060,824
Supplementary information:
Interest paid during the year 13,321 13,468
Interest received during the year 1,507 41
Supplementary information on non-cash activities:
Recognition of right-of-use asset and lease liability - 3,776,886
Shares issued pursuant to share subscription agreement 384,485 6,746,052
Expenses paid in shares and warrants 20,158 83,436
The accompanying notes are an integral part of the financial statements.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
ETHERNITY NETWORKS LTD. (hereinafter: the "Company"), was incorporated in
Israel on the 15th of December 2003 as Neracore Ltd. The Company changed its
name to ETHERNITY NETWORKS LTD. on the 10th of August 2004.
The Company provides innovative, comprehensive networking and security
solutions on programmable hardware for accelerating telco/cloud networks
performance. Ethernity's FPGA logic offers complete Carrier Ethernet Switch
Router data plane processing and control software with a rich set of
networking features, robust security, and a wide range of virtual function
accelerations to optimise telecommunications networks. Ethernity's complete
solutions quickly adapt to customers' changing needs, improving time-to-market
and facilitating the deployment of 5G, edge computing, and different NFV
appliances including 5G UPF, SD-WAN, vCMTS and vBNG with the current focus on
5G emerging appliances. The Company's customers are situated worldwide.
In June 2017 the Company completed an Initial Public Offering ("IPO") together
with being admitted to trading on the AIM Stock Exchange and issued 10,714,286
ordinary shares at a price of £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.
NOTE 2 - GOING CONCERN
The financial statements have been prepared assuming that the Company will
continue as a going concern. Under this assumption, an entity is ordinarily
viewed as continuing in business for the foreseeable future unless management
intends or has no realistic alternative other than to liquidate the entity or
to stop trading for at least, but not limited to, 12 months from the reporting
date. An 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
revenues anticipated in terms of the material contracts signed in the 2021 and
2022 financial years, the funds raised during the year ended 31 December 2022
and to date, expected inflows from the exercise of the 6p (£0.06) Warrants,
the current stage of the Company's life cycle, its losses and cash outflows,
including with respect to the development of the Company's products, the
expected timing and amounts of future revenues.
During the latter portion of 2021 and through 2022, the Company entered into
new contracts for supply of the Company solutions and products along with
deployment orders from existing customers, all of which including customer
indications for significant amounts of revenue billings for the latter portion
of the 2022 and 2023 financial years, and into 2024. In September 2022, the
Company noted that its cash reserves were approximately $4.2m at 30 June 2022.
During the year ended December 31, 2022, the Company incurred a net
comprehensive loss of $ 8 million and negative cash flows from operating
activities of $7.6million. The Company recognises that its cash reserves
remain under pressure until the customer commitments in terms of the signed
contracts are met from the end of H1 2023 and in mitigating this, in January
2023 the Company raised net funds (after costs) of ~$1.9m via both a Placing
and Subscription with associated Warrants, and further in May 2023, raised
further net funds via a Placing of ~$0.9m.
Further to this, in May and June 2023 the Company entered into significant
cost reduction exercises to align the internal resources with the current
contracts and expected deliveries thereon, with further cost reductions to be
implemented in July and August 2023 as the demand on resources reduces. These
steps, in conjunction with the reasonable expectation that the Company has
reasonable access to raise further financing and funding during the year, are
expected to produce short to medium term reductions in the use of cash
resources as well as boost the cash reserves, with the anticipation that the
resultant revenue flows in the second half of 2023 will start producing
positive monthly cash flows during this period continuing in to 2024.
Based on the abovementioned cash position, signed contracts, cost reduction
measures undertaken, and in the light of enquiries made by the Directors as to
the current liquidity position of the Company, as well as bearing in mind the
ability and success of the Company to raise funds previously, the Directors
have a reasonable expectation that the Company will have access to adequate
resources to continue in operational existence for the foreseeable future and
therefore have adopted the going concern basis of preparation in the financial
statements. The Directors recognise that their expectations are based on the
projected revenues and expenses remaining as forecast, however should events
occur that could materially impact the forecasts and cashflows of the Company,
including but not limited to disruptions in the supply of inventories or
delays imposed by customers, as a result 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.
NOTE 3 - SUMMARY OF ACCOUNTING POLICIES
The following accounting policies have been consistently applied in the
preparation and presentation of these financial statements for all of the
periods presented, unless otherwise stated. In 2022, 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 financial statements for the year ended 31 December were approved and
authorised for issue by the board of directors on 30 June 2023.
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.
C. Functional and presentation currency
The Company prepares its financial statements on the basis of the principal
currency and economic environment in which it operates (hereinafter - the
"functional currency").
The Company's financial statements are presented in US dollars ("US$") which
constitutes the functional currency of the Company and the presentation
currency of the Company.
D. Foreign currency transactions and balances
Specifically identifiable transactions denominated in foreign currency are
recorded upon initial recognition at the exchange rates prevailing on the date
of the transaction. Exchange rate differences deriving from the settlement of
monetary items, at exchange rates that are different than those used in the
initial recording during the period, or than those reported in previous
financial statements, are recognised in the statement of comprehensive income
in the year of settlement of the monetary item. Other profit or loss items are
translated at average exchange rates for the relevant financial year.
Assets and liabilities denominated in or linked to foreign currency are
presented on the basis of the representative rate of exchange as of the date
of the statement of financial position.
Exchange rate differentials are recognised in the financial statements when
incurred, as part of financing expenses or financing income, as applicable.
The exchange rates as at the 31st of December, of one unit of foreign currency
to each US dollar, were:
2022 2021
New Israeli Shekel ("NIS") 0.284 0.322
Sterling 1.204 1.351
Euro 1.066 1.132
E. Cash and cash equivalents
Cash and cash equivalents include cash on hand, call deposits and highly
liquid investments, including short-term bank deposits (with original maturity
dates of up to three months from the date of deposit), that are subject to an
insignificant risk of changes in their fair value and which do not have
restrictions as to what it may be used for.
F. Inventories
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.
G. Property and equipment
Property and equipment items are presented at cost, less accumulated
depreciation and net of accrued impairment losses. Cost includes, in addition
to the acquisition cost, all of the costs that can be directly attributed to
the bringing of the item to the location and condition necessary for the item
to operate in accordance with the intentions of management.
The residual value, useful life span and depreciation method of fixed asset
items are tested at least at the end of the fiscal year and any changes are
treated as changes in accounting estimate.
Depreciation is calculated on the straight‑line method, based on the
estimated useful life of the fixed asset item or of the distinguishable
component, at annual depreciation rates as follows:
%
Computers 33
Testing equipment 10-33
Furniture and equipment 6-15
Leasehold improvements 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.
H. Basic and diluted earnings (loss) per share
Basic and diluted earnings (loss) per share is computed by dividing the
earnings (loss) for the period applicable to Ordinary Shares by the weighted
average number of ordinary shares outstanding during the period.
In computing diluted earnings per share, basic earnings per share are adjusted
to reflect the potential dilution that could occur upon the exercise of
options or warrants issued or granted using the "treasury stock method" and
upon the settlement of other financial instruments convertible or settleable
with ordinary shares using the "if-converted method".
I. Severance pay liability
The Company's liability for severance pay pursuant to Israel's Severance Pay
Law is based on the last monthly salary of the employee multiplied by the
number of years of employment, as of the date of severance.
Pursuant to section 14 of Severance Pay Law, which covers the Company's
employees, monthly deposits with insurance companies release the Company from
any future severance obligations in respect of those employees (defined
contribution). Deposits under section 14 are recorded as an expense in the
Company's statement of comprehensive income.
J. Research and development expenses
Expenditures on the research phase of projects to develop new products and
processes are recognised as an expense as incurred.
Development activities involve a plan or a design for the production of new or
substantially improved products and processes. Development costs that are
directly attributable to a project's development phase are recognised as
intangible assets, provided they meet all of the following recognition
requirements:
• the technical feasibility of completing the intangible asset so that it
will be available for use or sale.
• intention to complete the intangible asset and use or sell it.
• ability to use or sell the intangible asset.
• ability to demonstrate how the intangible asset will generate probable
future economic benefits. Among other things, the entity can demonstrate the
existence of a market for the output of the intangible asset or the intangible
asset itself or, if it is to be used internally, the usefulness of the
intangible asset.
• the availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.
• ability to measure reliably the expenditure attributable to the intangible
asset during its development.
Development costs not meeting these criteria for capitalisation are expensed
as incurred.
Directly attributable costs include (if relevant) employee costs incurred on
software development along with an appropriate portion of relevant overheads
and borrowing costs.
The Company maintained the policy of recognising as an intangible asset the
costs arising from the development of its solutions, specifically the directly
associated costs of its Research and Development center.
The Company periodically reviews the principles and criteria of IAS 38 as
outlined above. Up 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.
K. Government grants
Government grants are recognised where there is reasonable assurance that the
grant will be received and all attached conditions will be complied with. When
the grant relates to an expense item (such as research and development of an
intangible asset), it is recognised as 'other income' on a systematic basis
over the periods that the costs, which it is intended to compensate, are
expensed.
Where the grant relates to an asset (such as development expenses that were
recognised as an intangible asset), it is recognised as deduction of the
related asset.
Grants from the Israeli Innovation Authority of the Ministry of Economy
(hereinafter - the "IIA") in respect of research and development projects are
accounted for as forgivable loans according to IAS 20 Accounting for
Government Grants and Disclosure of Government Assistance, as the company
might be required to refund such amount through payment of royalties.
Grants received from the IIA are recognised as a liability according to their
fair value on the date of their receipt, unless there is a reasonable
assurance that the amount received will not be refunded. The fair value is
calculated using a discount rate that reflects a market rate of interest at
the date of initial recognition. The difference between the amount received
and the fair value on the date of receiving the grant is recognised as a
deduction from the cost of the related intangible asset or as other income, as
applicable.
The amount of the liability is re-examined each period, and any changes in the
present value of the cash flows discounted at the original interest rate of
the grant are recognised in profit or loss.
Grants which do not include an obligation to pay royalties are recognised as a
deduction of the related asset or as other income, as applicable (See Note
21).
L. 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.
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.
3. Impairment
Financial assets and contract 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, contract assets at an amount that is equal to
the credit losses expected over the life of the instrument.
In assessing whether the credit risk of a financial asset has significantly
increased since initial recognition and in assessing expected credit losses,
the Company takes into consideration information that is reasonable and
verifiable, relevant and attainable at no excessive cost or effort. Such
information comprises quantitative and qualitative information, as well as an
analysis, based on the past experience of the Company and the reported credit
assessment, and contains forward-looking information.
Measurement of expected credit losses
Expected credit losses represent a probability-weighted estimate of credit
losses. Credit losses are measured at the present value of the difference
between the cash flows to which the Company is entitled under the contract and
the cash flows that the Company expects to receive.
Expected credit losses are discounted at the effective interest rate of the
financial asset.
4. Derivative financial instruments
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.F. 3 ., 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.
M. Off-set of financial instruments
Financial instruments and financial liabilities are presented in the
statements of financial position at their net value if the Company has a legal
and enforceable right of offset and the Company intends on settling the asset
and the liability on a net basis or simultaneously.
N. Share-based compensation
Share-based compensation transactions that are settled by equity instruments
that were executed with employees or others who render similar services, are
measured at the date of the grant, based on the fair value of the granted
equity instrument. This amount is recorded as an expense in profit or loss
with a corresponding credit to equity, over the period during which the
entitlement to exercise or to receive the equity instruments vests.
For 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 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.
O. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.
Fair value measurement is based on the assumption that the transaction will
take place in the asset's or the liability's principal market, or in the
absence of a principal market in the most advantageous market.
The fair value of an asset or a liability is measured using the assumptions
that market participants would use when pricing the asset or liability,
assuming that market participants act in their economic best interest.
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.
P. Transactions with controlling shareholders
Transactions with controlling shareholders are recognised at fair value. Any
difference between the fair value and the original terms of the transaction
represent capital contribution or dividend, as applicable and accordingly,
carried to equity.
Q. 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.
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.
Contract costs
Incremental costs of obtaining a contract with a customer, such as sales fees
to agents, are recognised as an asset when the Company is likely to recover
these costs. Costs to obtain a contract that would have been incurred
regardless of the contract are recognised as an expense as incurred unless the
customer can be billed for those costs.
Costs incurred to fulfil a contract with a customer and that are not covered
by another standard, are recognised as an asset when they: relate directly to
a contract the Company can specifically identify; they generate or enhance
resources of the Company that will be used in satisfying performance
obligations in the future; and they are expected to be recovered. In any other
case the costs are recognised as an expense as incurred.
Capitalised costs are amortised in profit or loss on a systematic basis that
is consistent with the pattern of transfer of the goods or services to which
the asset relates.
In every reporting period, the Company examines whether the carrying amount of
the asset recognised as aforesaid exceeds the consideration the entity expects
to receive in exchange for the goods or services to which the asset relates,
less the costs directly attributable to the provision of these goods or
services that were not recognised as expenses, and if necessary, an impairment
loss is recognised in the profit or loss.
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.
R. Income taxes
Taxes on income in the statement of comprehensive loss comprises the sum of
deferred taxes and current taxes (when applicable). Deferred taxes are
recognised in the statement of comprehensive income, except to the extent that
the tax arises from items which are recognised directly in other comprehensive
income or in equity. In such cases, the tax effect is also recognised in the
relevant item.
Deferred tax assets are recognised to the extent that it is probable that the
underlying tax loss or deductible temporary difference will be utilised
against future taxable income. This is assessed based on the Company's
forecast of future operating results, adjusted for significant non-taxable
income and expenses and specific limits on the use of any unused tax loss or
credit. See also Note 24.
Deferred tax assets are presented in the statement of financial position as
non-current assets.
S. Operating cycle
The normal operating cycle of the Company is a twelve-month period ending in
December 31 of each year.
T. Impairment testing of non-financial assets
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.
U. Ordinary shares
Ordinary shares issued by the Company which do not meet the definition of
financial liability or financial asset, were recognised as part of equity on
the basis of the consideration received in respect thereof, net of costs
attributed directly to the issue.
V. Equity and reserves
Share capital represents the nominal par value of shares that have been
issued.
Share premium includes any premiums received on issue of share capital. Any
transaction costs associated with the issuing of shares are deducted from
share premium, net of any related income tax benefits.
W. Provisions, contingent assets and contingent liabilities
Provisions for legal disputes, onerous contracts or other claims are
recognised when the Company has a present legal or constructive obligation as
a result of a past event, it is probable that an outflow of economic resources
will be required to settle the obligation and amounts can be estimated
reliably. Timing or amount of the outflow may still be uncertain.
No liability is recognised if an outflow of economic resources as a result of
present obligations is not probable. Such situations are disclosed as
contingent liabilities unless the outflow of resources is remote.
Provisions are measured at the estimated expenditure required to settle the
present obligation, based on the most reliable evidence available at the
reporting date, including the risks and uncertainties associated with the
present obligation. Where there are a number of similar obligations, the
likelihood that an outflow will be required in settlement is determined by
considering the class of obligations as a whole. Provisions are discounted to
their present values, where the time value of money is material.
Any reimbursement that the Company is virtually certain to collect from a
third party with respect to the obligation is recognised as a separate asset.
However, this asset may not exceed the amount of the related provision.
X. 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.
Y. 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 include:
• Amendments to IAS 12 Income Taxes-Deferred Tax related to Assets and
Liabilities arising from a Single Transaction
These amendments are not expected to have a significant impact on the
financial statements in the period of initial application and therefore the
disclosures have not been made.
NOTE 4 - SIGNIFICANT MANAGEMENT JUDGEMENT IN APPLYING
ACCOUNTING POLICIES AND ESTIMATION UNCERTAINTY
When preparing the financial statements, management makes a number of
judgements, estimates and assumptions about the recognition and measurement of
assets, liabilities, income and expenses.
Significant management judgement
• 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 is for 5
years with an option to extend it for a further 5 years. The Company expects
this lease to be extended for an additional 5 years - 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).
NOTE 5 - CASH
Cash consist of the following:
US dollars
31 December
2022 2021
In Sterling 89,695 5,817,800
In U.S. Dollar 205,285 622,042
In Euro 2,751 6,638
In New Israeli Shekel 418,084 614,344
715,815 7,060,824
NOTE 6 - TRADE RECEIVABLES
Trade and other receivables consist of the following:
US dollars
31 December
2022 2021
Trade receivables 1,373,718 1,422,280
Unbilled revenue 504,354 353,318
Less: provision for expected credit losses (579,000) (230,000)
Total receivables 1,299,072 1,545,598
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
US dollars
31 December
2022 2021
Components and raw materials 613,218 165,095
Finished cards 159,858 119,715
Total inventories 773,076 284,810
NOTE 8 - OTHER CURRENT ASSETS
Other current assets consist of the following:
US dollars
31 December
2022 2021
Prepaid Expenses 203,955 167,291
Deposits to suppliers 1,857 9,065
Government institutions 129,659 39,650
Other current assets 8,401 24,958
Total other current assets 343,872 240,964
NOTE 9 - PROPERTY AND EQUIPMENT
Details of the Company's property and equipment are as follows:
US dollars
Testing equipment Computers Furniture and equipment Leasehold improve-ments Total
Gross carrying amount
Balance 1 January 2022 881,112 164,813 49,237 11,193 1,106,355
Additions 241,362 11,316 6,160 - 258,838
Balance 31 December 2022 1,122,474 176,129 55,397 11,193 1,365,193
Depreciation - - - - -
Balance 1 January 2022 (286,980) (143,204) (16,096) (6) (446,286)
Depreciation (91,596) (12,308) (3,377) (1,300) (108,581)
Balance 31 December 2022 (378,576) (155,512) (19,473) (1,306) (554,867)
Carrying amount 31 December 2022 743,898 20,617 35,924 9,887 810,326
US dollars
Testing equipment Computers Furniture and equipment Leasehold improve-ments Total
Gross carrying amount
Balance 1 January 2021 725,298 141,565 45,628 60,102 972,593
Additions 156,145 23,248 3,609 11,193 194,195
Disposals * (331) - - (60,102) (60,433)
Balance 31 December 2021 881,112 164,813 49,237 11,193 1,106,355
Depreciation
Balance 1 January 2021 (215,303) (134,269) (13,055) (57,854) (420,481)
Disposals 261 - - 60,102 60,363
Depreciation (71,938) (8,935) (3,041) (2,254) (86,168)
Balance 31 December 2021 (286,980) (143,204) (16,096) (6) (446,286)
Carrying amount 31 December 2021 594,132 21,609 33,141 11,187 660,069
* Disposals of assets for zero proceeds.
NOTE 10 - INTANGIBLE ASSET
Details of the Company's intangible asset (R&D) is as follows:
US dollars
Total
Gross carrying amount
Balance 1 January 2022 9,550,657
Additions -
Balance 31 December 2022 9,550,657
Amortisation
Balance 1 January 2022 3,126,477
Amortisation 961,380
Balance 31 December 2022 4,087,857
Carrying amount 31 December 2022 5,462,800
US dollars
Total
Gross carrying amount
Balance 1 January 2021 9,550,657
Additions -
Balance 31 December 2021 9,550,657
Amortisation
Balance 1 January 2021 2,165,097
Amortisation 961,380
Balance 31 December 2021 3,126,477
Carrying amount 31 December 2021 6,424,180
The Company commissioned an impairment test of the capitalised intangible
assets as of 31 December 2019, by a top-tier independent international firm
with expertise in valuation procedures. According to such independent report,
the recoverable amount of these intangible assets, based on future forecasted
revenues, is approximately USD 27 million - more than three times the book
value and accordingly there has been no need to record an impairment to such
capitalised assets.
The Company tested the capitalised intangible assets for impairment as of 31
December 2022. Such analysis revealed a similar calculation as that determined
as at 31 December 2021 and therefore no impairment is warranted.
In establishing its indications, the Company referred to the fact that the
2019 independent report placed a value of $27m on the intangible asset. Having
given due consideration to the following, the Company believes that no further
impairment is required.
· 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.
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 2023 through 2032.
The primary assumptions used in determining the fair value of these intangible
assets are as follows:
· Corporate tax rate for the Company remains at 23%.
· The pre-tax discount rate used to value future cash flows is 28.3%
(post-tax 23.5%).
NOTE 11 - LEASES
A. Details of the Company's operating lease right of use assets are as
follows:
US dollars
Buildings Vehicles Total
Gross carrying amount
Balance 1 January 2022 3,158,849 95,702 3,254,551
Terminations - (95,702) (95,702)
Balance 31 December 2022 3,158,849 - 3,158,849
Accumulated depreciation
Balance 1 January 2022 (26,324) (72,025) (98,349)
Terminations - 95,702 95,702
Depreciation expense (315,884) (23,677) (339,561)
Balance 31 December 2022 (342,208) - (342,208)
Total right-of-use assets as at 31 December 2022 2,816,641 - 2,816,641
US dollars
Buildings Vehicles Total
Gross carrying amount
Balance 1 January 2021 441,068 129,742 570,810
Terminations (441,068) (34,040) (475,108)
Additions 3,158,849 - 3,158,849
Balance 31 December 2021 3,158,849 95,702 3,254,551
Accumulated depreciation
Balance 1 January 2021 (225,228) (53,363) (278,591)
Terminations 337,842 16,075 353,917
Depreciation expense (138,938) (34,737) (173,675)
Balance 31 December 2021 (26,324) (72,025) (98,349)
Total right-of-use assets as at 31 December 2021 3,132,525 23,677 3,156,202
The vehicle right-of-use assets comprises 4 vehicles used by employees, all of
which lease terms extend until the second half of 2022. Unexpectedly, one of
the leases ended in March 2021.
B. Lease liabilities are presented in the statement of financial
position as follows:
US dollars
31 December
2022 2021
Current 207,161 170,350
Non-current 2,505,777 3,069,721
2,712,938 3,240,071
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 had an option to renew it for a further five years. Such
renewal option was considered as reasonably certain to be exercised according
to IFRS 16.
Each lease generally imposes a restriction that, unless there is a contractual
right for the Company to sublet the asset to another party, the right-of-use
asset can only be used by the Company. Leases are either non-cancellable or
may only be cancelled by incurring a substantive termination fee. Some leases
contain an option to extend the lease for a further term or for the employee
who used the leased item to purchase the underlying leased asset outright at
the end of the lease term. The Company is prohibited from selling or pledging
the underlying leased assets as security. For leases over office buildings and
factory premises the Company must keep those properties in a good state of
repair and return the properties in their original condition at the end of the
lease. Further, the Company must insure items of property, plant and equipment
and incur maintenance fees on such items in accordance with the lease
contracts.
D. The lease liabilities are secured by the related underlying
assets. Future minimum lease payments at 31 December 2022 were as follows:
Minimum lease payments due
US dollars
2023 2024-2031 Total
Lease payments 416,709 3,402,870 3,819,579
Finance charges (209,548) (897,091) (1,106,639)
Net present values 207,161 2,505,779 2,712,940
NOTE 12 - SHORT- TERM BORROWINGS
Borrowings include the following financial liabilities:
Annual % Interest US dollars
rate((1)) 31 December
2022 2022 2021
Bank borrowings ((2)) P+4.5% 428,935 422,633
Total short- term borrowings 428,935 422,633
((1) ) The loans bore variable interest of prime + 4.5%. The
above interest rate is the weighted average rate as of 31 December 2022. The
loans were fully repaid by March 2023.
((2)) The Company has obtained a facility for invoice trade
financing of up to approximately $430,000 which will allow acceleration of
cash flows on invoicing receipts.
NOTE 13 - OTHER CURRENT LIABILITIES
Other short-term liabilities consist of:
US dollars
31 December
2022 2021
Salaries, wages and related costs 426,211 415,787
Provision for vacation 235,442 226,210
Accrued expenses and other 121,770 86,761
Deferred revenue 20,337 72,667
Short term lease liability 207,161 170,350
Related parties (see Note 28.A.) * 110,988 125,584
Total other short-term liabilities 1,121,909 1,097,359
* Relates to compensation from prior years. These amounts do not
bear interest. This liability was partially settled in May 2021.
NOTE 14 - IIA ROYALTY LIABILITY
During the years 2005 through 2012, the Company received grants from the
Israel Innovation Authority ("IIA") totaling approximately $3.05 million, to
support the Company's various research and development programs. The Company
is required to pay royalties to the IIA at a rate of 3.5%, of the Company
revenue up to an amount equal to the grants received, plus interest from the
date of the grant. The total amount including interest is approximately $3.1
million. However, as the Company is not expecting to produce revenues from
products funded by such grants it was determined that there is reasonable
assurance that the amount received will not be refunded and thus no liability
was recognised with respect to such grants as of December 31, 2022 and 2021.
Such contingent obligation has no expiration date.
As of 31 December 2022, the Company has repaid approximately $532,000 (2021:
$532,000) of these grants over numerous years, in the form of royalties. The
maximum amount of royalties that would be payable would be approximately
$3,100,000 as at 31 December 2022 (2021: $3,000,000).
NOTE 15 - EQUITY
A. Details regarding share capital and number of shares at 31
December 2022 and at 31 December 2021 are:
Share capital:
US dollars
31 December
2022 2021
Ordinary shares of NIS 0.001 par value 21,904 21,140
Total share capital 21,904 21,140
Number of shares:
31 December
2022 2021
Ordinary shares of NIS 0.001 par value - authorised 100,000,000 100,000,000
Ordinary shares of NIS 0.001 par value - issued and paid up 78,084,437 75,351,738
B. Description of the rights attached to the Ordinary Shares
All ordinary shares have equal rights including voting rights, rights to
dividends and to distributions upon liquidation. They confer their holder the
rights to receive notices, attend and vote at general meetings.
C. Share premium
Share premium includes proceeds received from the issuance of shares, after
allocating the nominal value of the shares issued to share capital.
Transaction costs associated with the issuance of shares are deducted from the
share premium, net of any related income tax benefit. The costs of issuing new
shares charged to share premium during the year ended 31 December 2022 was
$9,952 (2021: $375,732).
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.
E. IPO - Admission to the AIM exchange in London
On 29 June 2017 the Company completed an IPO together with being admitted to
trading on the AIM Stock Exchange. Total net proceeds from the issuance
amounted to approximately $17,800,000. The Company trades on the AIM Stock
Exchange under the symbol "ENET".
Concurrent with the IPO, the Company issued 162,591 five-year options to the
IPO broker that could have been exercised at an exercise price of £1.40 (see
Note 16.C.) These options expired on 29 June 2022.
F. Shares issued during the accounting periods
During the year ended 31 December 2022, 2,732,699 (2021: 27,883,241) ordinary
shares were issued, as follows:
Number of shares issued during year ended 31 December
Note 2022 2021
Exercise of employee options 1 - 706,667
Issuance of ordinary shares )issued together with warrants( 2 - 13,149,943
Exercise of warrants 2 - 3,500,010
Shares issued pursuant to share subscription agreement 3 2,695,593 10,221,621
Expenses paid for in shares and warrants 5 37,106 305,000
2,732,699 27,883,241
1 Details of shares issued to employees and former employees, upon the
exercise of their employee options, are as follows:
Date options exercised Exercise price of options Number of shares issued during year ended 31 December
2022 2021
11 January 2021 $ 0.10 - 220,000
16 February 2021 £ 0.12 - 6,667
11 October 2021 $ 0.10 - 480,000
- 706,667
The amount received by the Company upon the exercise of these options during
the year ended 31 December 2021 was $71,113- see Note 16.A. for further
details related to the employee options.
2 Details of the equity raises are as follows:
September 2021 equity raise
In September 2021 the Company issued 13,149,943 shares attached to 13,149,943
warrants. Each share and attached warrant were issued for £ 0.35, realising
gross proceeds of $6.25 million (£ 4.6 million) and net proceeds after
issuance expenses of approximately $5.85 million (£ 4.3 million).
Each warrant is exercisable at £ 0.60 ("£ 0.60 warrants") with a life term
of 18 months. The warrants are not transferable, are not traded on an exchange
and have an accelerator clause. The £ 0.60 Warrants will be callable by the
Company if the closing mid-market share price of the Company exceeds £ 0.80
over a 5-consecutive day period, within 12 months of the issuance date. 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 $1.59
million was allocated as a derivative warrants liability with the remainder of
the proceeds amounting to $4.40 million (after deduction of the allocated
issuance costs of $376,000) being allocated to share capital and share
premium. The issuance expenses were allocated in a consistent manner to the
above allocation. The expenses related to the warrant component were carried
to profit or loss as an immediate expense while the expenses related to the
share capital component were netted against the amount carried to equity. In
subsequent periods the company measures the derivative financial liability at
fair value and the periodic changes in fair value are carried to profit or
loss under financing costs or financing income, as applicable. The fair value
of the derivative warrant liability is categorised as level 3 of the fair
value hierarchy.
The fair value valuation of the warrants was based on the Black-Scholes option
pricing model, calculated in two stages. Initially, the fair value of these
call warrants issued to investors were calculated, assuming no restrictions
applied to such call warrants. As the Company, under certain circumstances,
has a right to force the investors to either exercise their warrants or have
them cancelled, the second calculation calculates the value of the warrants as
call warrants that were issued by the investor to the company. The net fair
value results from reducing the call investor warrants fair value from the
call warrants fair value, as long as the intrinsic value of the call warrants
(share price at year end less exercise price of the warrants) is not greater
than such value. Should the intrinsic value of the warrants be higher than the
Black-Scholes two stage method described above, then the intrinsic value of
the warrants is considered to be a more accurate measure to use in determining
the fair value. The following factors were used in calculating the fair value
of the warrants at their issuance:
Instrument Term Weighted average Share price at issuance Exercise price Risk free rate Volatility
0.60p option 18 months £ 0.519 £ 0.60 0.19% 81.3%
0.80p option 12 months £ 0.519 £ 0.80 0.08% 77.6%
Of the 13,149,943 shares and 13,149,943 warrants subscribed for, the
director's participation in this issuance was 253,431 shares and 253,431 £
0.60 warrants, on the same terms as outside investors participated.
None of the £ 0.60 Warrants had been exercised by 31 December 2022 and their
fair value of zero (2021: $1.2 million) at such date is disclosed as a
warrants liability in the statement of financial position.
Upon this successful equity raise being concluded in September 2021, the
brokers for this transaction received 257,929 three year warrants exercisable
at £ 0.35 per warrant ("Broker Warrants"). The fair value of these warrants
at the time of issuance was approximately $113,190. As at 31 December 2022,
none of these warrants have been exercised.
July 2020 equity raise
In July 2020 the Company issued 7,333,334 shares attached to 7,333,334
warrants. Every 2 shares and the attached 2 warrants were issued for £ 0.24
(£ 0.12 per share and attached warrant), realising gross proceeds of
$1,103,069 (£ 880,000) and net proceeds after issuance expenses of
approximately $999,000 (£ 827,500).
Every 2 warrants were comprised of 1 warrant exercisable at £0.20 ("£0.20
Warrants") and 1 warrant exercisable at £0.30 ("£0.30 Warrants"), both with
a life term of 12 months. The warrants are not transferable and are not traded
on an exchange. The Warrants have an accelerator clause. The £0.20 Warrants
will be callable by the Company if the closing mid-market share price of the
Company exceeds £0.30 over a 5-consecutive day period. The £0.30 Warrants
will be callable by the Company if the closing mid-market share price of the
Company exceeds £0.40 over a 5-consecutive day period. If such 5-consecutive
day period condition is met, the Company may serve notice on the warrant
holders to exercise their relevant warrants within 7 calendar days, failing
which, such remaining unexercised warrants shall be cancelled.
As the exercise price of the warrants is denominated in GBP
and not in the Company's functional currency, it was determined that the
Company's obligation under such warrants cannot be considered as an obligation
to issue a fixed number of equity instruments in exchange for a fixed amount
of cash. Accordingly, it was determined that such warrants represent a
derivative financial liability required to be accounted for at fair value
through the profit or loss category. Upon initial recognition the Company
allocated the gross proceeds as follows: an amount of approximately $82,000
was allocated as derivative warrants liability with the remainder of the
proceeds amounting to $917,000 (after deduction of the allocated issuance
costs of $104,000) being allocated to share capital and share premium. The
issuance expenses were allocated in a consistent manner to the above
allocation. The expenses related to the warrant component were carried to
profit or loss as an immediate expense while the expenses related to the share
capital component were netted against the amount carried to equity. In
subsequent periods the company measures the derivative financial liability at
fair value and the periodic changes in fair value are carried to profit or
loss under financing costs or financing income, as applicable. The fair value
of the derivative warrant liability is categorised as level 3 of the fair
value hierarchy.
The fair value valuation of the warrants was based on the Black-Scholes option
pricing model, calculated in two stages. Initially, the fair value of these
call warrants issued to investors were calculated, assuming no restrictions
applied to such call warrants. As the Company, under certain circumstances,
has a right to force the investors to either exercise their warrants or have
them cancelled, The second calculation calculates the value of the warrants as
call warrants that were issued by the investor to the company. The net fair
value results from reducing the call investor warrants fair value from the
call warrants fair value, as long as the intrinsic value of the call warrants
(share price at year end less exercise price of the warrants) is not greater
than such value. Should the intrinsic value of the warrants be higher than the
Black-Scholes two stage method described above, then the intrinsic value of
the warrants is considered to be a more accurate measure to use in determining
the fair value. The following factors were used in calculating the fair value
of the warrants at their issuance:
Instrument Term Share price at issuance Exercise price for call warrants Risk free rate Volatility Trigger price for call investor warrants
0.20p option 1 year £ 0.135 £ 0.20 0.16% 66.3% £ 0.30
0.30p option 1 year £ 0.134 £ 0.30 0.17% 66.3% £ 0.40
Of the 7,333,334 shares and 7,333,334 warrants subscribed for, the directors'
participation in this issuance was 1,666,668 shares, 833,334 £0.20 warrants
and 833,334 £ 0.30 warrants, on the same terms as outside investors
participated.
During December 2020, the accelerator clause for the £ 0.20 warrants had been
activated by the Company and 3,491,676 of these warrants were exercised for
which the Company issued the same number of shares, while 174,991 warrants not
exercised were cancelled in terms of the Warrant Instrument. The Directors
exercised all their £ 0.20 warrants held.
Upon this successful equity raise being concluded in July 2020, the broker for
this transaction received 252,750 one-year warrants exercisable at £0.12 per
warrant ("Broker Warrants"). The fair-value of these warrants at the time of
issuance was approximately $13,000. All of these warrants were exercised in
2020. See Note 16.E.b.
The total amount received by the Company upon the exercise of the £0.20
Warrants and the Broker Warrants was approximately $0.99 million. Such amount,
together with the fair value of the warrants derivative liability was
recognised within the equity upon exercise of the warrants totaling an amount
of $1.63 million.
In May 2021 the accelerator clause for the £0.30 Warrants was activated by
the Company and 3,500,010 of these warrants were exercised for which the
Company issued the same number of shares, while 166,657 warrants not
exercised, were cancelled. The Directors exercised all their £0.30 Warrants
held.
The total amount received by the Company upon the exercise of the £0.30
Warrants was approximately $1.45 million. Such amount, together with the fair
value of the warrants derivative liability was recognised within the equity
upon exercise of the warrants totaling an amount of $2.01 million.
3 On 24 September 2020 the Company entered into a share subscription
deed / agreement ("SSD") with an institutional investor ("Investor"), to raise
up to £3,200,000 (Approx. $4,100,000) as follows:
Closing Closing date Subscription amount Amount receivable by Company Date that amount was received
1(st) Up to 5 business days following execution of the SSD £ 547,000 £ 500,000 25 Sep. 2020
2(nd) Up to 240 calendar days following the 1(st) closing date £ 438,000 £ 400,000 31 Dec. 2020
Amounts received until 31 December 2020 £ 985,000 £ 900,000
3(rd) Up to 240 calendar days following the 2(nd) closing date £ 438,000 £ 400,000 4 Mar. 2021
4(th) Up to 240 calendar days following the 3(rd) closing date £ 438,000 £ 400,000 16 Apr. 2021
5(th) By mutual agreement £ 823,500 £ 750,000 30 April 2021
6(th) By mutual agreement £ 823,500 £ 750,000 1 Nov. 2021
Amounts received until 31 December 2021 £ 3,508,000 £ 3,200,000
According to the subscription agreement, the company is entitled to terminate
the agreement (with respect to any subscription amount not yet closed), upon
payment of a cancellation fee of $48,000.
Pursuant to the share subscription agreement, the investor has the right, at
its sole discretion to require the Company to issue shares in relation to the
subscription amount outstanding (or a part of it), under which, the number of
shares to be issued for such settlement, shall be determined using an average
five daily VWAP share price of the Company's shares as selected by the
Investor, during the 20 trading days prior to such settlement notice
("Conversion Price"). However, the company has certain rights to make cash
payments in lieu of the above share settlement, yet the Investor is entitled
to exclude from such cash payment, up to 30% of the cash settlement amount.
As the company's obligation under the share subscription agreement with
respect for each subscription amount received by the company, represent an
obligation to be settled through the issuance of variable number of shares and
as the agreements include several embedded derivatives (such as early
prepayment options, principal amounts indexed to an average price of equity
instrument) the company has designated this obligation as financial liability
at fair value through profit or loss under "liability related to share
subscription agreement".
Accordingly, upon initial recognition and at each reporting period the
liability is measured at fair value with changes carried to profit or loss
under financing costs or financing income, as applicable.
Upon settlement or a partial settlement of such liability, such when the
investor calls for the settlement of the aggregate subscription amount
outstanding (or any part of it), for a fixed number of shares, as calculated
upon such settlement notice, the fair value of the liability, related to the
settled portion is carried to equity.
The fair value of the liability related to share subscription agreement is
categorised as level 3 of the fair value hierarchy. See Note 26.B.
Activity for year ending 31 December 2021
During 2021, the Investor subscribed for a further $3.18 million (£2.30
million), with a total face value of $3.49 million (£2.52 million).
The Investor converted all remaining outstanding subscription amounts during
2021 as follows, thereby bringing the relationship to a conclusion, without
any balances remaining as at 31 December 2021:
Notice date of conversion Amount converted Shares Issued
GBP USD
16 April 2021 500,000 689,250 1,805,054
28 April 2021 600,000 834,240 2,033,898
19 October 2021 400,000 515,616 1,307,190
3 November 2021 744,500 1,004,439 2,433,007
9 November 2021 823,500 1,098,983 2,642,472
10,221,621
Pursuant to the SSD as described above, the Investor converts subscription
amounts into shares of the Company at a discounted price. Upon each
conversion, the difference between the actual market value of shares issued to
the Investor and the amount converted is recorded in finance costs, which in
2021 amounted to $1,642,492.
Activity for year ending 31 December 2022
In February 2022, the Investor signed a new share subscription with the
Company, subscribing for a further $2.0 million, with a total face value of
$2,060,000. In March 2022 the full $2.0 million was funded as a prepayment for
the subscription shares.
The number of subscription shares to be issued is 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.
The Investor converted the following subscription amount during 2022 as
follows:
Notice date of conversion Amount converted - USD Shares Issued
22 September 2022 320,000 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.
4 Concurrent with the initial investment by the Investor in September
2020, the Company issued 880,000 shares to the Investor for the par value of
the shares, being $258. The Investor at its discretion, may choose to pay for
these 880,000 shares, calculated at the then current Conversion Price. Upon
issuance of the shares, the company recognised the amount of $196,259,
representing the fair value of the investor's obligation to payment for the
shares under the caption "proceeds due on account of shares issued" - see Note
8. As the contractual terms of such financial asset do not create an
entitlement to cash flows on specified dates that are solely payment of
principal and interest, the financial asset was classified to measurement at
fair value through profit or loss. As at 31 December 2020 the fair value of
this asset was valued at $301,658 calculated by using the Conversion Price at
that date of £ 0.251. The difference between the fair value recognised upon
initial recognition and as at 31 December, 2020 was carried to profit or loss
as financing income.
The Investor paid for these shares in April 2021 using the then applicable
Conversion Price of £ 0.292 for proceeds of approximately $356,000. The
approximately $55,000 difference between the fair value as at 31 December,
2020 and the fair value upon payment for these shares, was carried to profit
or loss as financing income.
5 In June 2020, an advisor was contracted to provide investment
advisory services to the Company and received 150,000 shares as part payment
for their fees. The fair value of these shares at the time of issuance was
approximately $39,300. The advisor also received 100,000 three year warrants
exercisable at £ 1.00, vesting at the rate of 16,667 warrants every six
months. The contract was terminated after 16,667 warrants had vested. The fair
value of such warrants was approximately $700. See Note 16.E.a below.
In December 2020, the company agreed to settle amounts due to two directors in
lieu of their directors' fees amounting to approximately $83,000 through the
issuance of 305,000 ordinary shares of the company. The company issued the
shares in January 2021- See Notes 16.E.d and 28D.
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
ordinary shares equal to a monthly amount of £1,250. On 14 April 2022 the
Company issued 37,106 ordinary shares in lieu of the $20,158 owing to Joseph
Albagli for the above-mentioned period. See Note 28.C.
NOTE 16 - SHARE-BASED COMPENSATION
A. In 2013 the Company's Board of Directors approved a share option
plan for the grant of options without consideration, to employees,
consultants, service providers, officers and directors of the Company. The
options are exercisable into the Company's ordinary shares of NIS 0.01 par
value. The exercise price and vesting period (generally four years) for each
grantee of options, is determined by the Company's Board of Directors and
specified in such grantee's option agreement. In accordance with Section 102
of the Israel tax code, the Israeli resident grantee's options, are held by a
trustee. The options are not cashless (they need to be paid for) and expire
upon the expiration date determined by the Board of Directors (generally ten
years from the date of the grant). The expiration date may be brought forward
upon the termination of grantee's employment or services to the Company.
Options do not vest after the termination of employment or services to the
Company. Options are not entitled to dividends.
The following table summarises the salient details and values regarding the
options granted (all amounts are in US Dollars unless otherwise indicated):
Option grant dates
17 Feb 17 Feb 17 Feb 23 Nov 2021 18 Mar 2021
2022 2022 2022
486,000 240,000
Number of options granted 130,000 400,000 351,000
Exercise price in $ 0.545 0.395 0.395 0.598* 0.461
Recipients of the options Employees Employees Employees Employees Employees
Approximate fair value at grant date (in $):
Total benefit 35,902 116,762 102,458 122,161 47,198
Per option benefit 0.29 0.29 0.29 0.25 0.20
Assumptions used in computing value:
Risk-free interest rate 2.98% 2.98% 2.98% 1.67% 1.71%
Dividend yield 0.00% 0.00% 0.00% 0.00% 0.00%
Expected volatility 70% 70% 70% 35% 35%
Expected term (in years) 10.0 10.0 10.0 8.7 9.4
Expensed amount recorded for year ended:
31 December 2021 - - - 11,880 14,780
31 December 2022 22,477 75,322 44,277 59,309 6,603
The remaining value of these options at 31 December 2022, which have yet to be
recorded as expenses, amount to $159,127 (2021: $160,991).
As some of these employees left the employ of the company prior to 31 December
2022, their options were cancelled.
* Average exercise price. High - $0.715. Low - $0.434
Share based compensation was treated in these financial statements as follows:
US dollars
Year ended 31 December
2022 2021
Total expensed amount recorded 221,362 77,583
Total capitalised amount recorded - -
Total 221,362 77,583
The following tables present a summary of the status of the employee option
grants by the Company as of 31 December 2022 and 2021:
Weighted
average
exercise
Number price (US$)
Year ended 31 December 2022
Balance outstanding at beginning of year 2,951,920 0.27
Granted 881,000 0.42
Exercised - 0.10
Forfeited (141,000) 0.36
Balance outstanding at end of the year 3,691,920 0.31
Balance exercisable at the end of the year 2,333,503
Weighted
average
exercise
Number price (US$)
Year ended 31 December 2021
Balance outstanding at beginning of year 3,140,920 0.18
Granted 726,000 0.55
Exercised (706,667) 0.10
Forfeited (208,333) 0.31
Balance outstanding at end of the year 2,951,920 0.27
Balance exercisable at the end of the year 1,810,753
B. The option pool was increased to 6,500,000 options by a
resolution passed on 16 December 2021 and approved by the tax authorities.
C. The following table summarises information about employee options
outstanding at 31 December 2022:
Weighted Weighted
Outstanding average Weighted Exercisable average
at 31 remaining average at 31 remaining
Exercise December contractual exercise December contractual
price 2022 life (years) price (US$) 2022 life (years)
$0.10 1,128,920 0.5 0.10 1,128,920 0.5
$0.20 129,000 4.2 0.20 129,000 4.2
£0.12 73,000 7.6 0.16 73,000 7.6
£0.20 370,000 7.9 0.26 246,667 7.9
£0.21 140,000 7.5 0.26 105,000 7.5
£0.21 200,000 7.9 0.27 166,667 7.9
£0.29 311,000 9.1 0.39 14,250 9.1
£0.29 400,000 9.1 0.39 100,000 9.1
£0.33 175,000 7.6 0.46 43,750 7.6
£0.40 130,000 5.6 0.54 32,500 5.6
£0.45 455,000 7.6 0.60 113,750 7.6
£1.05 40,000 4.2 1.28 40,000 4.2
£1.40 30,000 4.7 1.83 30,000 4.7
£1.00 60,000 5.5 1.32 60,000 5.5
£1.00 50,000 6.6 1.25 50,000 6.6
3,691,920 2,333,503
The following table summarises information about employee options outstanding
at 31 December 2021:
Weighted Weighted
Outstanding average Weighted Exercisable average
at 31 remaining average at 31 remaining
Exercise December contractual exercise December contractual
price 2021 life (years) price (US$) 2021 life (years)
$0.10 1,128,920 1.5 0.10 1,128,920 1.5
$0.20 129,000 5.2 0.20 129,000 5.2
£0.12 73,000 8.6 0.16 48,667 8.6
£0.20 370,000 8.9 0.26 123,333 8.9
£0.21 210,000 8.5 0.26 87,500 8.5
£0.21 200,000 8.9 0.27 133,333 8.9
£0.33 175,000 8.6 0.46 - 8.6
£0.45 486,000 8.6 0.60 - 8.6
£1.05 40,000 5.2 1.28 40,000 5.2
£1.40 30,000 5.7 1.83 30,000 5.7
£1.00 60,000 6.5 1.32 45,000 6.5
£1.00 50,000 7.6 1.25 45,000 7.6
2,951,920 1,810,753
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. As
described in Note 3.U., costs incurred in raising equity finance were applied
as a reduction from those equity sale proceeds and is recorded in Other
Components of Equity. Such warrants expired on 29 June 2022.
E. Shares and equity instruments issued in lieu of payment for
services provided
a. In September 2020 the Company entered into a share subscription
agreement as described in Note 15.F. 3 . The Company was obliged to pay the
Investor a funding fee equivalent to $90,000, paid by issuing the Investor
with 455,130 shares calculated at the contract Conversion Price. The fair
value of these shares issued was approximately $99,500 which was initially
recorded as prepaid financing costs, which are to be amortised over the
expected period of this agreement. Approximately $23,000 was amortised to
finance expenses in 2020 with the balance of approximately $67,000 amortised
in 2021.
b. In December 2020, the company agreed to settle amounts due to two
directors in lieu of their directors fees amounting to approximately $83,000
through the issuance of 305,000 ordinary shares of the company. The company
issued the shares in January 2021- See Notes 15.F.5. and 28.D.
c. Upon the successful equity raise concluded in September 2021, as
described in Note 15.F. 2 , the brokers responsible for this transaction
received 257,929 three-year warrants exercisable at £ 0.35 per warrant. The
fair value of these warrants at the time of issuance was approximately
$113,000. As at 31 December 2022, none of these warrants have been exercised.
d. On 14 April 2022 the Company issued 37,106 ordinary shares to the
Company's non-executive chairman in lieu of $20,158 owing as part of his
agreed remuneration. See also Note 15.F. 5 and Note 28.C.
NOTE 17 - REVENUE
US dollars
Year ended 31 December
2022 2021
Sales 2,546,289 2,225,134
Royalties 232,805 251,953
Maintenance and support 158,330 158,333
Total revenue 2,937,424 2,635,420
NOTE 18 - RESEARCH AND DEVELOPMENT EXPENSES
US dollars
Year ended 31 December
2022 2021
Employee remuneration, related costs and subcontractors ((*)) 5,458,163 4,435,744
Maintenance of software and computers 134,651 115,149
Insurance and other expenses 57,006 31,874
Amortisation 961,380 961,380
Grant procurement expenses 7,595 6,765
Total research and development expenses 6,618,795 5,550,912
((*)) Including share based compensation. 160,134 54,962
NOTE 19 - GENERAL AND ADMINISTRATIVE EXPENSES
US dollars
Year ended 31 December
2022 2021
Employee remuneration and related costs ((*)) 689,721 581,776
Professional fees 496,865 510,295
Rentals and maintenance 282,706 289,786
Depreciation 446,816 259,843
Travel expenses 8,608 173
Impairment losses of trade receivables 599,200 80,000
Total general and administrative expenses 2,523,916 1,721,873
((*)) Including share based compensation. 51,627 10,750
NOTE 20 - MARKETING EXPENSES
US dollars
Year ended 31 December
2022 2021
Employee remuneration and related costs ((*)) 903,834 833,896
Marketing expenses 258,094 203,930
Travel expenses 5,606 7,079
Total marketing expenses 1,167,534 1,044,905
((*)) Including share based compensation. 9,601 11,871
NOTE 21 - OTHER INCOME
As described in Note 3.K, when a government grant is related to an expense
item, it is recognised as other income.
NOTE 22 - FINANCING COSTS
US dollars
Year ended 31 December
2022 2021
Bank fees and interest 35,150 32,147
Lease liability financial expenses 227,246 30,195
Revaluation of liability related to share subscription agreement measured at 2,884,254
FVTPL
230,992
Revaluation of warrant derivative liability - -
Expenses allocated to issuing warrants - 127,856
Expenses allocated to share subscription agreement 80,000 -
Total financing costs 573,388 3,074,452
NOTE 23 - FINANCING INCOME
US dollars
Year ended 31 December
2022 2021
Revaluation of proceeds due on account of shares (financial asset measured at - 49,723
FVTPL)
Revaluation of warrant derivative liability 1,214,993 108,723
Lease liability financial income - 8,929
Interest received 1,507 41
Exchange rate differences, net 51,152 60,988
Total financing income 1,267,652 228,404
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 2022, the Company has carry-forward losses for
Israeli income tax purposes of approximately $31 million. 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. Deferred taxes
US dollars
Year ended 31 December
Origination Utilisation of
and reversal previously Total
of temporary recognised tax loss Deferred tax
differences carry-forwards expense
Balance at 1 January 2021 186,772 - 186,772
Deductions (186,772) - (186,772)
Balance at 31 December 2021 - - -
Deductions - - -
Balance at 31 December 2022 - - -
D. Theoretical tax reconciliation
For the years ended 31 December 2022 and 2021, the following table reconciles
the expected tax expense (benefit) per the statutory income tax rate to the
reported tax expense in profit or loss as follows:
US dollars
Year ended 31 December
2022 2021
Loss before tax 8,002,612 9,360,295
Tax expense (benefit) at statutory rate 23% 23%
Expected tax expense (benefit) at statutory rate (1,840,601) (2,152,868)
Changes in taxes from permanent differences in share-based compensation 50,913 17,844
Increase in loss carryforwards - not affecting the deferred tax asset 1,789,688 2,135,024
Income tax expense - 186,772
NOTE 25 - BASIC AND DILUTED LOSS PER ORDINARY SHARE
A. The earnings and the weighted average number of shares used in
computing basic loss per ordinary share, are as follows:
US dollars
Year ended 31 December
2022 2021
Loss for the year attributable to ordinary shareholders (8,002,612) (9,360,295)
Number of shares
Year ended 31 December
2022 2021
Weighted average number of ordinary shares used in the computation of basic 76,013,296 67,492,412
loss per ordinary share
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
US dollars
31 December 2022
NIS GBP Euro US $ Total
Assets
Cash 418,084 89,695 2,751 205,285 715,815
Trade receivables 259,368 - - 1,039,704 1,299,072
677,452 89,695 2,751 1,244,989 2,014,887
Liabilities
Short term borrowings 428,935 - - - 428,935
Trade payables 626,256 21,909 - 137,418 785,583
Liability related to share subscription agreement - - - 1,836,555 1,836,555
Non-current lease liabilities 2,505,777 - - - 2,505,777
3,560,968 21,909 - 1,973,973 5,556,850
(2,883,516) 67,786 2,751 (728,984) (3,541,963)
US dollars
31 December 2021
NIS GBP Euro US $ Total
Assets
Cash 614,344 5,817,800 6,638 622,042 7,060,824
Trade receivables 424,685 - - 1,120,913 1,545,598
1,039,029 5,817,800 6,638 1,742,955 8,606,422
Liabilities
Short term borrowings 422,633 - - - 422,633
Trade payables 518,745 17,279 5,659 110,075 651,758
Warrants liability - 1,214,993 - - 1,214,993
Non-current lease liabilities 3,069,721 - - - 3,069,721
4,011,099 1,232,272 5,659 110,075 5,359,105
(2,972,070) 4,585,528 979 1,712,880 3,327,317
· 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 Book value Effect on profit (loss)/equity (before tax) from the changes caused by the
market factor market factor
Increase at the rate of 31 December Decrease at the rate of
10% 5% 2022 5% 10%
Cash (51,053) (25,527) 510,530 25,527 51,053
Trade receivables (25,937) (12,968) 259,368 12,968 25,937
Short term borrowings 42,894 21,447 (428,935) (21,447) (42,894)
Trade payables 64,817 32,408 (648,165) (32,408) (64,817)
Non-current lease liabilities 250,578 125,289 (2,505,777) (125,289) (250,578)
Total 281,299 140,649 (2,812,979) (140,649) (218,299)
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 Book value Effect on profit (loss)/equity (before tax) from the changes caused by the
market factor market factor
Increase at the rate of 31 December Decrease at the rate of
10% 5% 2021 5% 10%
Cash (643,878) (321,939) 6,438,782 321,939 643,878
Trade receivables (42,469) (21,234) 424,685 21,234 42,469
Short term borrowings 42,263 21,132 (422,633) (21,132) (42,263)
Trade payables 54,168 27,084 (541,683) (27,084) (54,168)
Warrants liability 87,298 43,649 (872,977) (43,649) (87,298)
Non-current lease liabilities 306,972 153,486 (3,069,721) (153,486) (306,972)
Total (195,646) (97,822) 1,956,453 97,822 195,646
· Credit risk
All of the cash and cash equivalents and other short-term financial assets as
of 31 December, 2022 and 2021 were deposited with one of the major banks in
Israel.
Trade receivables as of 31 December 2022 and 2021 were from customers in
Israel, the U.S., 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). As at 31 December 2022, more than 90% of net
trade receivables were less than 90 days old.
· Trade receivables
IFRS 9 provides a simplified model of recognising lifetime expected credit
losses for all trade receivables as these items do not have a significant
financing component.
In measuring the expected credit losses, the trade receivables have been
assessed by management on a collective basis as well as on a case by case
basis. Trade receivables are written off when there is no reasonable
expectation of recovery. Management have indicated a concern regarding the
receivable from a few customers, for which a provision has been made. As at 31
December 2022, the provision for expected credit losses was $579,000 (2021:
$230,000) - see Note 6 for more details.
US dollars
Balance at 1 January 2021 150,000
Additions 80,000
Reductions -
Balance at 31 December 2021 230,000
Additions 589,000
Reductions (240,000)
Balance at 31 December 2022 579,000
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 2022 and 2021 were lease liabilities
which are serviced monthly. The short-term borrowings at 31 December 2022 and
2021 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.
As at 31 December 2022, the Company's non-derivative financial liabilities
have contractual maturities as summarized below:
US dollars
31 December 2022
Within 6 months 6 to 12 months 1 to 3 later then
years 3 years
Short term borrowings 428,935 - - -
Trade payables 785,583 - - -
Other short-term liabilities 686,039 228,709 - -
Lease liabilities 101,516 105,645 467,331 2,038,446
Total 2,002,073 334,354 467,331 2,038,446
As at 31 December 2022, the Company's derivative financial liabilities have
contractual maturities as summarized below:
US dollars
31 December 2022
Within 8 months later then 8
months
Liability related to share subscription agreement 1,836,555 -
Total 1,836,555 -
B. Fair value of financial instruments
General
The financial instruments of the Company include mainly trade receivables and
debit balances, credit from banking institutions and others, trade payables
and credit balances, IIA liability, and balances from transactions with
shareholders.
The principal methods and assumptions used in calculating the estimated fair
value of the financial instruments are as follows (fair value for disclosure
purposes):
Financial instruments included in current asset items
Certain instruments (cash and cash equivalents, other short-term financial
assets, trade receivables and debit balances) are of a current nature and,
therefore, the balances as of 31 December, 2022 and 2021, 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, 2022 and 2021 approximate their fair value. Other
instruments are measured at fair value through profit or loss.
Financial instruments' fair value movements
The reconciliation of the carrying amounts of financial instruments classified
within Level 3 (based on unobservable inputs) is as follows:
US dollars US dollars
Financial asset Financial liabilities
Proceeds due on account of shares issued Liability related to share subscription agreement Warrants liability
Balance at 1 January 2021 301,658 (841,944) (286,253)
Recognition in asset (liability) - (3,485,349) (1,585,751)
Proceeds received for shares issued (355,818) - -
Revaluation Adjustment 49,723 62,193 108,724
Exchange rate differences 4,437 90,744 -
Issuance of shares - 4,174,356 -
Warrants exercised - - 548,287
Fair Value at 31 December 2021 - - (1,214,993)
Recognition in asset (liability) - (2,000,000) -
Liability exchanged for shares issued - 320,000 -
Revaluation Adjustment - (156,555) 1,214,993
Fair Value at 31 December 2022 - (1,836,555) -
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 September 2020 share subscription agreement, the investor has
the right, at its sole discretion to require the Company to issue shares in
relation to the subscription amount outstanding (or a part of it), under
which, the number of shares to be issued for such settlement, shall be
determined using an average five daily VWAP share price of the Company's
shares as selected by the Investor, during the 20 trading days prior to such
settlement notice ("Conversion Price"). However, the Company has certain
rights to make cash payments in lieu of the above share settlement, yet the
Investor is entitled to exclude from such cash payment up to 30% of the cash
settlement amount. As at 31 December 2021, this liability had been
extinguished - see Note 15.F. 3 .
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 - see Note 15.F. 3 .
Warrants liability
This liability is valued at the fair value of the £0.60 Warrants as described
in detail in Note 15.F. 2 . 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
The Company has implemented the principles of IFRS 8 ('Operating Segments'),
in respect of reporting segmented activities. In terms of IFRS 8, the
management has determined that the Company has a single area of business,
being the development and delivery of high-end network processing technology.
The Company's revenues from customers are divided into the following
geographical areas:
US dollars
Year ended 31 December
2022 2021
Asia 290,800 598,858
Europe 131,000 130,000
Israel 429,954 760,559
United States 2,085,670 1,146,003
2,937,424 2,635,420
%
Year ended 31 December
2022 2021
Asia 9.9% 22.7%
Europe 4.5% 4.9%
Israel 14.6% 28.9%
United States 71.0% 43.5%
100.0% 100.0%
Revenue from customers in the Company's domicile, Israel, as well as its major
market, the United States and Asia, have been identified on the basis of the
customer's geographical locations.
The Company's revenues from major customers as a percentage of total revenue
was:
%
Year ended 31 December
2022 2021
Customer A 58% 29%
Customer B 10% 14%
Customer C 8% 14%
Customer D 6% 12%
Customer E 5% 10%
88% 78%
NOTE 28 - RELATED PARTIES
A. Founders
In April 2017, the employment agreement of the two founders of the Company Mr.
David Levi and Mr. Baruch Shavit, was amended, in terms of which each of them,
in addition to their salary, is entitled to a performance bonus of 5% of the
Company's annual profit before tax. For each year, the bonus shall be capped
at $250,000 each. Such bonus is dependent on their continual employment by the
Company.
Baruch Shavit had an amount due to him for compensation originating in prior
years. As at 31 December 2022, the Company owed a balance of $110,988 (2021:
$125,584) to him - see Note 13.
One of the founders participated in the equity and warrant issue in September
2021 as follows - see Note 15.F. 2 .
Number of securities purchased in September 2021 GBP amount paid
Founder Shares £0.60 warrants for shares and £0.60 warrants
David Levi 253,431 253,431 88,701
The two founders participated in the equity and warrant issue in July 2020 as
follows - see Note 15.F. 2 .
Number of securities purchased in July 2020 GBP amount paid
Founder Shares £0.20 warrants £0.30 warrants for shares and £0.20 and £0.30 warrants upon exercise of £0.20 warrants in December 2020 upon exercise of £0.30 warrants in May 2021
David Levi 1,333,334 666,667 666,667 160,000 133,334 200,000
Baruch Shavit 333,334 166,667 166,667 40,000 33,333 50,000
1,666,668 833,334 833,334 200,000 166,667 250,000
B. Chief Financial Officer
Mr. Reichenberg, the CFO of the Company, received 109,000 ESOP options on his
appointment in March 2017, vesting over four years, exercisable at $0.20 per
option and with an expiration date in March 2027.
In November 2020 Mr. Reichenberg received 100,000 ESOP options, vesting over
three years, exercisable at £0.20 per option and with an expiration date in
November 2030, the fair value of which, amounted to $12,292 at the date of
grant.
Mr. Reichenberg was initially appointed as a director of the Company on 29
June 2017 and was reappointed on 22 June 2020.
C. Remuneration of key management personal including directors for the
year ended 31 December 2022
US dollars
Name Position Salary and benefits Share based compe-nsation
Total
David Levi Chief Executive Officer ((2)) 288,495 37,661 326,156
Mark Reichenberg Chief Financial Officer ((2)) 201,038 3,173 204,211
Shavit Baruch VP Research & Development ((2)) 276,691 37,661 314,352
Chen Saft-Feiglin ((1)) Non Executive Director 18,318 - 18,318
Zohar Yinon ((1)) Non Executive Director 18,806 - 18,806
Joseph Albagli ((3)) Non Executive Chairman 34,582 18,532 53,114
Richard Bennett ((1)(4)) Non Executive Director 13,379 - 13,379
851,308 97,027 948,335
((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.
Remuneration of key management personal including directors for the year ended
31 December 2021
US dollars
Name Position Salary and benefits Share based compe-nsation
Total
Graham Woolfman ((1)(3)) Non-Executive Chairman 6,912 - 6,912
David Levi Chief Executive Officer ((2)) 237,510 - 237,510
Mark Reichenberg Chief Financial Officer ((2)) 200,011 8,133 208,144
Shavit Baruch VP Research & Development ((2)) 237,432 - 237,432
Neil Rafferty ((1) (4)) Non Executive Director 51,268 - 51,268
Chen Saft-Feiglin ((1)) Non Executive Director 18,327 - 18,327
Zohar Yinon ((1)) Non Executive Director 18,079 - 18,079
Joseph Albagli ((5)) Non Executive Chairman 26,615 16,625 43,240
796,155 24,758 820,912
((1) ) Independent director.
((2) ) Key management personnel as well as director's long-term
employee benefits and termination benefits account for less than 12.5% of
their salary and benefits.
((3) ) Resigned 17 November 2020, resignation effective from 18
February 2021.
((4) ) Resigned 1 December 2021.
((5) ) Appointed 10 March 2021. As part of the agreed compensation,
every month shares equal to the value of £1,250 are accrued. The shares have
not yet been allotted.
D. Directors' equity interests in the Company as at 31 December 2022
Shares Options and warrants
Name Direct holdings Unexercised vested options Unvested options Total options and warrants
9,587,160 110,710 150,000 260,710
David Levi
Shavit Baruch 5,091,667 110,710 150,000 260,710
Joseph Albagli 47,106 - - -
Mark Reichenberg - 175,667 33,333 209,000
14,725,933 397,087 333,333 730,420
Directors' equity interests in the Company as at 31 December 2021
Shares Options and warrants
Name Direct holdings Unexercised vested options Unvested options Unexercised £0.60 warrants Total options and warrants
9,437,160 60,710 - 253,431 314,141
David Levi
Shavit Baruch 5,091,667 60,710 - - 60,710
Mark Reichenberg - 142,333 66,667 - 209,000
14,528,827 263,753 66,667 253,431 583,851
NOTE 29 - RECONCILIATION OF LIABILITIES ARISING FROM
FINANCING ACTIVITIES
Lease Liabilities Short Term Borrowings Total
3,240,071 422,633 3,662,704
1 January 2022
Cashflow
- Repayments (158,849) (493,338) (652,187)
- Proceeds - 527,790 527,790
Non-cash movement
- Exchange rate differences (368,284) (28,150) (396,434)
31 December 2022 (()*()) 2,712,938 428,935 3,141,873
( )
(()*()) Including current maturities of $207,161
Lease Liabilities Short Term Borrowings Total
306,783 411,726 718,509
1 January 2021
Cashflow
- Repayments (136,180) (887,585) (1,023,765)
- Proceeds - 900,192 900,192
Non-cash movement
- Terminations (130,120) - (130,120)
- Additions 3,158,849 - 3,158,849
- Exchange rate differences 40,739 (1,700) 39,039
31 December 2021 (()*()) 3,240,071 422,633 3,662,704
( )
(()*()) Including current maturities of $266,531
For financial
liabilities to be settled through issuance of ordinary shares see notes 15.F
and 26B.
NOTE 30 - SUBSEQUENT EVENTS
1. In January and February 2023, the Company, through a placing agent,
issued 23,571,430 ordinary shares and 23,571,430 warrants, at a price of
£0.07 for each share and corresponding warrant, raising gross proceeds of
£1.65m (approx. $2m). The warrants expire on 8 February 2025 and initially
were exercisable at a price of £0.15. The warrants contain an accelerator
clause, whereby should the closing mid-market price of the Company's shares
equal or exceed £0.20 over consecutive 5 trading days, then the Company may
serve notice on the Warrant holders to exercise their warrants within 7
calendar days, following which the un-exercised warrants will be cancelled. In
May 2023, the Company reduced the exercise price of these warrants to 6p (from
15p) and the accelerator trigger may be activated based on a price of 7.5p
(instead of 20p). Two of the Company's officers participated in this share
placement as follows:
Officer Position Subscription details
Amount Shares Warrants
David Levi Chief Executive Officer £ 212,000 3,028,571 3,028,571
Shavit Baruch VP Research & Development £ 46,814 668,771 668,771
£ 258,814 3,697,342 3,697,342
2. Concurrent with the share placement in 1. above, 573,429 warrants
were issued to the placing agent. These warrants are exercisable at £0.07 and
expire in January 2025.
3. In January 2023, the Company issued 2,388,771 ordinary shares in lieu
of £167,214 (approx. $204K) owing for outstanding fees to service providers.
These shares have a one year lock-up.
4. In February 2023, an Extraordinary General Meeting of the Company
approved an increase of the Company's authorised share capital to 200,000 New
Israeli Shekel, consisting of 200,000,000 ordinary shares.
5. In May 2023, the Company, through a placing agent, issued 26,116,667
ordinary shares at a price of £ 0.03 for each share, raising gross proceeds
of £783,500 (approx. $975K). Two of the Company's officers participated in
this share placement as follows:
Officer Position Subscription details
Amount Sh
ar
es
David Levi Chief Executive Officer £ 25,000 833,334
Joseph Albagli Non Executive Chairman £ 2,500 83,334
£ 27,500 916,668
6. Concurrent with the share placement in 5. above, 772,500 warrants
were issued to the placing agent. These warrants are exercisable at £ 0.03
and expire in May 2025.
7. In May 2023, the Investor described in Note 15.F. 3 converted an
additional $230,000 into 6,629,236 ordinary shares at a conversion price of
2.8p.
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