NOTES TO FINANCIAL STATEMENTS

NOTE 1 - GENERAL:

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:

The financial statements as of December 31, 2018 and 2017, and for the year ended December 31, 2018 and for the period from February 8, 2017 (date of commencement of operations) to December 31, 2017, are in compliance with International Financial Reporting Standards (hereinafter - “IFRS”), and interpretations issued by the IFRS Interpretations Committee applicable to companies reporting under IFRS. The financial statements comply with IFRS as issued by the International Accounting Standards Board.

In connection with the presentation of these financial statements, the following should be noted:

Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (hereinafter - the “Functional Currency”). The financial statements of the Company are presented in U.S. dollars, which is the Company’s Functional Currency.

Transactions made in a currency which is different from the Functional Currency are translated into the Functional Currency using the exchange rates prevailing at the dates of the transactions or valuations where the items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the end-of-year exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss as finance income (expense).

NETNUT LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

Cash and cash equivalents include cash in hand, short-term bank deposits and other short-term highly liquid investments with original maturities of three months or less, which are subject to insignificant risk of changes in value.

The trade receivable balance represents the unconditional right to consideration because only the passage of time is required before the payment is due from Company customers in the ordinary course of business.

Trade receivables are recognized initially based on their transaction price as calculated according to IFRS 15, less a provision for doubtful accounts (hereinafter - “Provision for Impairment” or “Provision for Doubtful Accounts”). For further details see Note 4.

Goodwill arising from a business combination represents the excess of the overall amount of the consideration transferred over the net amount as of acquisition date of the identifiable assets acquired and the liabilities assumed.

Impairment reviews of the cash-generating-unit (CGU) to which goodwill was allocated are undertaken annually and whenever there is any indication of impairment of a CGU. The carrying amount of the Company’s assets (which constitutes a single CGU), including goodwill, is compared to its recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment loss is allocated to reduce the carrying amount of the Company’s assets at the following order: first to reduce the carrying amount of any goodwill allocated to a CGU and subsequently to the remaining assets of the Company, which fall within the scope of IAS 36, on a proportionate basis based on the carrying amount of each Company asset.

Any impairment loss is recognized immediately in profit or loss and is not subsequently reversed. As of December 31, 2018 and 2017, the Company did not record impairment of goodwill. For further details see Note 5.

Through December 31, 2018 and 2017, the Company has not met the criteria for capitalizing of research and development expenses as intangible assets, and accordingly, no asset has so far been recognized in the financial statements in respect of capitalized research and development expenses. Consequently, the research and development expenses of the Company are fully recognized as incurred.

The server usage right was first recognized at fair value at the acquisition date and is amortized over the period of estimated benefit, using a straight-line method and estimated useful life of four years. The amortization is presented under cost of revenues. For further details see Note 5.

NETNUT LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less selling costs and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels of identifiable cash flows (cash-generating units). As mentioned above, the Company constitutes a single cash generating unit. Non-monetary assets, other than goodwill, that were previously impaired are reviewed at each statement of financial position date for possible reversal of the impairment recognized. Other intangible assets, whose useful life is indefinite, are tested annually for impairment.

The Company has adopted IFRS 9, “Financial Instruments”, from February 8, 2017 (date of commencement of operations).

The Company classifies its financial assets at amortized cost. The classification is determined, among other things, in accordance with the purpose for which the financial assets were acquired. The basis of classification depends on the Company’s business model and the contractual cash flow characteristics of the financial asset.

Financial assets at amortized cost are held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and their contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. These assets are classified as current assets, except for maturities of more than 12 months after the balance sheet date, which are classified as non-current assets. The Company’s financial assets at amortized cost include “accounts receivable” and “cash and cash equivalents” (see also sections c and d above).

The Company recognizes an allowance for expected credit losses on financial assets. At each reporting date, the Company assesses whether the credit risk on a financial asset has increased significantly since the initial recognition.

If the financial asset is determined to have low credit risk at the reporting date, the Company assumes that the credit risk on a financial asset has not increased significantly since initial recognition. The Company measures the allowances for expected credit losses on trade receivables that are within the scope of IFRS 15, “Revenue from Contracts with Customers”, and on financial assets for which the credit risk has increased significantly since initial recognition based on the estimated lifetime credit losses. Otherwise, the Company measures the allowance for credit losses at an amount equals to 12-month expected credit losses at the current reporting date.

Trade payables are the Company’s obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers.

NETNUT LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

The tax expenses for the reported years comprise current and deferred taxes. Taxes are recognized in the statements of profit or loss, except to the extent that they relate to items recognized directly in equity. In that case, the tax is also recognized in equity.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company operates and generates taxable income. The Company’s management periodically evaluates the tax aspects applicable to its taxable income based on the relevant tax laws and makes provisions in accordance with the amounts payable to the Israeli Tax Authorities.

Deferred income tax is provided using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.

However, deferred income tax liabilities are not accounted for if they arise from initial recognition of goodwill. Also, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

A defined contribution plan is a post-employment benefits scheme under which group companies pay fixed contributions into a separate and independent entity. The Company has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

The Company’s severance pay and pension obligations are generally funded through payments to insurance companies or trustee-administered funds. Under their terms, the said pension plans meet the criteria for defined contribution plan as above.

Every employee is legally entitled to vacation and recreation benefits, which are computed on an annual basis. This entitlement is based on the term of employment. The Company charges a liability and expense due to vacation and recreation pay, based on the benefits that have been accumulated for each employee.

Since the Company expects that the benefit arising from vacation pay will be fully settled within 12 months of the end of the reporting period in which the employees provide the relating services, the liability in respect of this benefit is measured in accordance with the additional amount, which the Company expects to pay for unutilized vacation benefits accrued at the end of the reporting period.

NETNUT LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

Severance pay is paid when an employee is terminated by the Company before the normal retirement date, or when an employee had agreed to accept voluntary redundancy in exchange for these benefits. The Company recognizes severance pay liabilities at the earlier of:

The Company has adopted IFRS 15, “Revenue from Contracts with Customers” (hereinafter - “IFRS 15”) from February 8, 2017 (date of commencement of operations).

IFRS 15 provides two approaches to revenue recognition: one point in time or over time. The model framework consists of five steps for analyzing transactions to determine the timing and amount of revenue recognition.

The Company’s revenues from its renewable monthly contracts with its customers are recognized ratably over the respective contract periods, since the customers consume benefits from the services as the Company performs.

Costs to obtain a contract are expensed as incurred since commissions payable upon renewals are commensurate with the initial commission.

Revenue is recognized net of Value Added Tax.

Standards, amendments and interpretations to new standards that are not yet effective and have not been early adopted by the Company:

IFRS 16 will replace upon first-time implementation the existing guidance in IAS 17 “Leases” (hereinafter - “IAS 17”). The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases, and is expected to have material impact mainly on the accounting treatment applied by the lessee in a lease transaction.

IFRS 16 changes the existing guidance in IAS 17 and requires lessees to recognize a lease liability that reflects future lease payments and a “right-of-use asset” in all lease contracts (except for the following), with no distinction between financing and capital leases. IFRS 16 exempts lessees in short-term leases or the when underlying asset has a low value.

NETNUT LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.

IFRS 16 also changes the definition of a “lease” and the manner of assessing whether a contract contains a lease.

IFRS 16 will be effective retrospectively for annual periods beginning on or after January 1, 2019, taking into account the reliefs specified in the transitional provisions of IFRS 16.

In respect of agreements in which the Company is the lessee, the Company elected to apply the standard for the first time by recognizing lease liabilities, for leases that were previously classified as operating leases, based on the present value of the remaining lease payments, discounted at the incremental interest rate of the lessee as at the date of first-time application. At the same time, the Company will recognize a right-of-use asset at an amount equal to the amount of the lease liabilities, adjusted to reflect any prepaid or accrued lease payments in respect of those leases. As a result, the application of the standard is not expected to have an effect on the retained earnings balance.

As part of the first-time application of the standard, the Company has elected to apply the following practical expedients:

In respect of leases in which the Company is the lessee, to apply a single discount rate to a portfolio of leases with reasonably similar characteristics.

For leases in which the Company is the lessee, not to recognize a right-of-use asset and a lease liability in respect of leases whose lease period ends within 12 months of the date of initial application.

For leases in which the Company is the lessee, to exclude initial direct costs from the measurement of the right-of-use asset upon initial application.

For leases in which the Company is the lessee, to use hindsight in determining the lease term where the contract includes extension or termination options.

Furthermore, it should be noted that the Company elected to apply the exemption regarding the recognition of short-term leases and leases in which the value of the underlying asset is low.

Where the Company has right-of-use assets which meets the definition of investment property, they should be presented in the statement of financial position as investment property. Furthermore, right-of-use assets, that will be accounted for as investment property according to the fair value model, will be measured at fair value upon initial application. This measurement may impact the retained earnings balance as of the date of initial recognition.

Based on its assessment to date, upon application of IFRS 16 on January 1, 2019, right-of-use lease assets and lease liabilities totaling approximately $439 thousand will be recognized in the balance sheet.

The main expected effects of the application of the standard on the statement of income or loss for the year 2019 are a decrease of approximately $107 thousand in lease expenses, an increase of $91 thousand in depreciation costs and an increase of approximately $7 thousand in financing expenses. Overall, the expected effect of the standard’s application on the statement of income or loss for the year 2019 is an increase of approximately $9 thousand in loss.

NETNUT LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

IFRIC 23 clarifies how to apply the recognition and measurement requirements of IAS 12 for uncertainties in income taxes. According to IFRIC 23, when determining the taxable profit (loss), tax bases, unused tax losses, unused tax credits and tax rates when there is uncertainty over income tax treatments, the entity should assess whether it is probable that the tax authority will accept its tax position. Insofar, as it is probable that the tax authority will accept the entity’s tax position, the entity will recognize the tax effects on the financial statements according to that tax position. On the other hand, if it is not probable that the tax authority will accept the entity’s tax position, the entity is required to reflect the uncertainty in its accounts by using one of the following methods: the most likely outcome or the expected value. IFRIC 23 clarifies that when the entity examines whether or not it is probable that the tax authority will accept the entity’s position, it is assumed that the tax authority with the right to examine any amounts reported to it will examine those amounts and that it has full knowledge of all relevant information when doing so. Furthermore, according to IFRIC 23 an entity has to consider changes in circumstances and new information that may change its assessment. IFRIC 23 also emphasizes the need to provide disclosures of the judgments and assumptions made by the entity regarding uncertain tax positions.

IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. The application of this standard is expected to have negligible impact on the Company’s financial statements.

NOTE 3 - FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT:

Financial risk factors - foreign exchange risks

The Company’s activities expose it to a Foreign exchange risk.

The Company operates internationally and is exposed to foreign exchange risk arising from foreign currency transactions, primarily with respect to the NIS. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities denominated in foreign currency.

The Company hedges and minimizes the foreign exchange risk by ensuring that the amounts of net current assets at a specific point in time correspond to the amount of current liabilities at that point in time.

Assets and liabilities, which are not measured on a recurring basis at fair value, are presented at their carrying amount, which approximates their fair value.

NOTE 4 - ACCOUNT RECEIVABLES - TRADE, net

As of December 31, 2018 and 2017, the account receivables-trade balance comprises open accounts. The Company did not record a provision for doubtful accounts as of December 31, 2018 and 2017.

As of December 31, 2018 and 2017, the recoverable amount of the Company, which constitutes a single CGU, is calculated on the basis of its fair value less cost to sell of Company’s share. As of December 31, 2018 and 2017, the recoverable amount exceeded the Company’s equity. The Company’s value in use calculations included a pre-tax discount rate of 24.5% and 26.9% at December 31, 2017 and 2018, respectively, and a long-term growth rate of 2% as of both dates.

NETNUT LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 6 - BUSINESS COMBINATION

On February 22, 2017, the Company has completed the business combination deal with a significant shareholder. As part of the business combination the company issued 100,000 ordinary shares to its parent company for the purpose of the acquisition of a developed technology including the usage right in servers of the parent company as well as access to the parent company’s vendors and the right to implement the parent company’s business model in the Company’s operation. The server usage right is valid as well the Company is active, with no further payments, and include the installation right on the Company’s premises. The value of the ordinary shares issued in the business combination were based on the sale of ordinary A shares to a third party occurring concurrently with the business combination, see also Note 11(b). The acquisition was accounted for as a business combination under common control, at fair value, considering the indirect involvement of such third party in the transaction.

The fair value of the server’s usage right was computed according to the DCF model, using the following principal assumptions: WACC 20.5% and long term growth rate of 2%. For the Company fair value valuation, the Company used Option-Pricing Method with the following principal assumptions: expected volatility of 65.6%, risk-free interest of 2.47%, expected term of 5 years.

The table below presents the fair value of offered shares and the amounts recorded in these financial statements:

NOTE 7 - TAXES ON INCOME:

The income of the Company is taxed at the regular corporate tax rate which is 24% for 2017 and 23% for the year 2018 and thereafter.

The Company has not been assessed since its establishment.

As of December 31, 2018 and 2017 the Company’s carryforward tax losses totaled to approximately $518 thousand and $301 thousand, respectively.

Deferred tax assets in respect of carryforward operating tax losses are recognized in case that it is expected that the relating tax benefit would be realized against a future taxable income.

The Company did not recognize deferred taxes for these losses since their utilization is not expected in the foreseeable future.

NETNUT LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 7 - TAXES ON INCOME (continued):

A reconciliation of the theoretical tax expense, assuming all income is taxed at the regular tax rates applicable to companies in Israel (see section a above) and the actual tax expense is as follows: