NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL:

Management’s plans include the continued commercialization of the Company’s products and raising capital through the sale of additional equity securities, debt or capital inflows from strategic partnerships. There are no assurances however, that the Company will be successful in obtaining the level of financing needed for its operations. If the Company is unsuccessful in commercializing its products and raising capital, it may need to reduce activities, curtail or cease operations.

NOTE 2 - BASIS OF PREPARATION:

The Company’s condensed consolidated financial statements for the six and three month periods ended June 30, 2019 have been prepared in accordance with International Accounting Standard (hereinafter - “IAS”) 34, “Interim Financial Reporting”. These condensed consolidated financial statements, which are unaudited, do not include all the information and disclosures that would otherwise be required in a complete set of annual financial statements and should be read in conjunction with the annual financial statements as of December 31, 2018 and their accompanying notes, which have been prepared in accordance with International Financial Reporting Standards (hereinafter - “IFRS”) as published by the International Accounting Standards Board (hereinafter – “IASB”). The results of operations for the six and three month periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2019 or for any other interim period.

The preparation of interim financial statements requires the Company’s management to exercise its judgment and to use significant accounting estimates and assumptions that affect the application of the Company’s accounting policies and the amounts of reported assets, liabilities, income and expenses. Actual results may materially differ from those estimates.

In preparation of these condensed consolidated financial statements, the significant judgments that were exercised by the management in applying the Company’s accounting policies and the key sources of estimation uncertainty were similar to those applied in the Company’s annual financial statements for the year ended December 31, 2018.

SAFE-T GROUP LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES:

The accounting policies applied in the preparation of these condensed consolidated financial statements are consistent with those applied in the preparation of the annual financial statements as of December 31, 2018, except for the below mentioned:

IFRS 16 replaces 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 impact mainly 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.

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.

The Company adopted IFRS 16 on January 1, 2019, using a modified retrospective transition approach, and as a result did not adjust prior periods.

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 recognized 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 has no 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.

The effect upon first-time implementation on the Company’s condensed consolidated statement of financial position are: right-of-use lease assets of approximately $166 thousand, current lease liabilities of approximately $97 thousand and non-current lease liabilities of approximately $69 thousand

SAFE-T GROUP LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued):

The Company accounts for business combination by applying the acquisition method.

The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, and the liabilities incurred by the acquirer to former owners of the acquiree in exchange for control of the acquiree. The consideration transferred also includes the fair value of any asset or liability arising from a contingent consideration arrangement.

Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

Identified assets acquired and liabilities assumed as part of a business combination are initially measured at fair value at the acquisition date, except for certain exceptions in accordance with International Financial Reporting Standard 3 “Business Combinations” (Revised) (hereinafter - “IFRS 3R”).

Contingent consideration incurred as a part of a business combination is initially measured at fair value at the acquisition date. Subsequent changes in fair value of contingent consideration classified as an assets or liability, are recognized in accordance with International Financial Reporting Standard 9 “Financial Instruments” (hereinafter - “IFRS 9”) in profit or loss.

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker in the Company, who is responsible for allocating resources and assessing the performance of the operating segments. See note 10.

A financial liability, in which upon initial recognition, the transaction price is different than its fair value is initially recognized at fair value adjusted to defer the difference between the fair value at initial recognition and the transaction price (“day 1 loss”).

After initial recognition, the unrecognized day 1 loss of the said financial liability is amortized over the contractual life of each financial liability.

Upon conversion or exercise of convertible debentures or warrants (including green-shoe option) for which an unrecognized day 1 loss exists, the carrying amounts are classified to equity.

NOTE 5 - FINANCIAL INSTRUMENTS AND FINANCIAL RISKS:

Level 1 financial instruments:

The Company has a financial liability in respect of derivative financial instruments, which is measured at fair value through profit or loss. As of December 31, 2018, the amount of the financial liability is $729 thousand.

Level 3 financial instruments:

The Company has several financial liabilities measured at fair value through profit or loss, which meet the level 3 criteria as of June 30, 2019 and December 31, 2018.

The Company evaluated the fair value of convertible debentures, contingent consideration, derivative financial instruments and anti-dilution feature that were issued in connection with capital raising rounds.

The following table presents the changes in level 3 instruments for the six-month period ended June 30, 2018 (unaudited):

The following table presents the changes in level 3 instruments for the three-month period ended June 30, 2018 (unaudited):

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

SAFE-T GROUP LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - CONVERTIBLE DEBENTURES

On April 9, 2019, the Company entered into a Securities Purchase Agreement (the “Agreement”) with certain lenders (“Lenders”), according to which the Company obtained a convertible loan in an aggregate amount of $6 million (“Transaction Price”), for the issuance of convertible debentures (“Convertible Debentures”, or “Debentures”) and 2,926,830 warrants (“Warrants”) to purchase 2,926,830 ADSs. The first tranche of the loan, in the amount of $1 million was received during April 2019, and the second tranche, in the amount of $5 million, was received during June 2019.

The Convertible Debentures have an 18-month term from issuance and bear interest at 8% per annum payable quarterly in cash or ADSs. The Debentures initial conversion rate was set to $2.05 per ADS, and then was reset to $1.65 following triggering an adjustment mechanism that was agreed upon in the Agreement. The conversion price will be reset, but not below $0.40 per ADS, if there is a subsequent issuance of the Company’s securities below the conversion price, to the price of the subsequent issuance, and the Debentures contain other customary anti-dilution features, with the Black-Scholes value of the Debentures payable upon the occurrence of a fundamental transaction. The Company can redeem the Debentures after the Effective Date (as defined in the Agreement) upon 20 trading days prior notice to the Lenders at 120% of the principal amount of the Debentures, plus accrued interest.

The Warrants have an exercise price per ADS of $2.3575, a 5-year term and will be exercisable for cash or on a cashless basis if no resale registration statement is available for resale of the ADSs issuable upon exercise. The exercise price will be reset, but not below $0.40, if within 18-month from the issuance there is a subsequent issuance of the Company’s securities below the exercise price, to the price of the subsequent issuance, and the Warrants contain other customary anti-dilution features, with the Black-Scholes value of the Warrants payable upon the occurrence of a fundamental transaction.

The Lenders were granted a 12-month participation right in a subsequent financing, up to the amount equal to 50% of the subsequent financing. The Lenders have a right to purchase additional Debentures on the same terms until 6 months from the Effective Date (“Green-Shoe Option”).

For accounting purposes, these financial instruments were classified as long-term financial liabilities in the condensed consolidated statement of financial position as of June 30, 2019 (the Warrants and Green-Shoe Option as “derivative financial instruments” and the Debentures as “convertible debenture”). The Convertible Debentures were designated at fair value through profit or loss, given the conversion option derivative embedded in such instrument. Changes in the Company’s own credit risk from the date of initial recognition are negligible. The Warrants and Green-Shoe Option are derivative financial instruments measured at fair value through profit or loss. These financial liabilities were initially recognized at fair value, adjusted to defer the difference between the fair value at initial recognition and the Transaction Price (“day 1 loss”). These financial liabilities are measured at fair value in each period-end while unrecognized day 1 loss is amortized over the contractual life of each instrument.

During June 2019, the Lenders were issued 346,428 ADSs upon conversion of Debentures, and as a result, a net amount of $224 thousand was classified to equity. As of June 30, 2019, the convertible debentures and the derivative financial instruments totaled to $2,527 thousand and $1,327 thousand, respectively. See also note 11 for subsequent events occurred after the balance sheet date.

NOTE 7 - EQUITY:

SAFE-T GROUP LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 - BUSINESS COMBINATION

On April 4, 2019, the Company entered into a Share and Asset Purchase Agreement with NetNut, pursuant to which the Company will acquire all (100%) of the outstanding share capital of NetNut (“Purchased Shares”), a private Israeli company, in the business proxy network solution industry, and certain assets of DiViNetworks Ltd. (“DiVi”), NetNut’s controlling shareholder, which its assets are required for the ongoing operations of NetNut (the “Purchased Assets”).

In consideration for the Purchased Shares, the Company shall pay NetNut’s shareholders:

An amount equal to $3,400 thousand (the “Initial Shares Purchase Price”), out of which (i) $1,614,742 will be paid on Closing (as defined below) in immediate funds (in addition to an amount of $250 thousand down payment paid by the Company upon signing of Share and Asset Purchase Agreement); (ii) $175,257 will be deposited in escrow; and (iii) $1,360 thousand will be paid by issuance of 24,347,410 ordinary shares of the Company (based on NIS 0.2031 which is a per share 30-day average price of the Company’s shares on the TASE prior to the date on which the Share and Asset Purchase Agreement was signed (the “Initial Consideration PPS”)). The parties agreed that the Initial Shares Purchase Price may be increased or decreased on a dollar-for-dollar basis in the event NetNut has a negative working capital on the date of the Closing;

An amount of up to $5,000 thousand payable in contingent consideration (the “EarnOut Amount”), will be paid and distributed to the shareholders of NetNut upon NetNut achieving certain revenue milestones in 2019, hence, the payment of the payable EarnOut Amount will be deferred to the time when the Company’s financial results for the year 2019 are published (the “2019 Financial Statements”). The Company, at its sole discretion, may elect to pay up to fifty percent (50%) of the EarnOut Amount in ordinary shares (the “EarnOut Shares”), provided that in any event, the amount of the EarnOut Shares will not exceed 44,756,273 ordinary shares (representing a quotient of half of the maximum EarnOut Amount [i.e. $2,500 thousand] divided by the Initial Consideration PPS).

In consideration for the sale, delivery, transfer and assignment of the Purchased Assets, the Company shall pay DiVi at Closing:

An aggregate amount equal to $6,300 thousand (the “Assets Purchase Price”). The Assets Purchase Price shall be paid as follows:

An amount equal to $3,455,258 payable at Closing in immediately payable funds;

An amount equal to $324,742 will be deposited in escrow;

An amount equal to $2,520 thousand, payable at Closing in ordinary shares, issued at a per share price equal to the Initial Consideration PPS, i.e. 45,114,327 ordinary shares.

In connection with the transaction, the Company has agreed to pay to certain finders of the transaction a fee equal to the sum of 3% of the total purchase price of the transaction. The Company has elected to pay up to 50% of such fee in equity securities of the Company.

On June 12, 2019, the Company completed the acquisition according to the terms mentioned above (the “Closing”).

The allocation of the purchase price has been based upon estimates of the fair value of assets acquired and liabilities assumed as of the Closing date. Management, with the assistance of independent valuation specialists, is currently assessing the fair value of the tangible and intangible assets acquired and liabilities assumed. A final determination of the fair value of NetNut’s assets and liabilities is still subject to the completion of further analyses from those included in these condensed consolidated financial statements.

The market price per share is the share closing price in the TASE as of June 12, 2019, translated into U.S. dollars using the exchange rate as of such date.

The fair value of the contingent consideration was valued using a Monte Carlo model with the expected sales and volatility as well as the discount rate being the primary inputs.

Transaction costs were charged to profit or loss under “general and administrative expenses”.

Technology and supplier relations and customer relations are amortized on a straight-line basis over 5 years and 7.5 years, respectively. Goodwill of primarily represented the value of expected synergies arising from the acquisition as well as assembled workforce, and was allocated entirely to the NetNut segment.

From the date of acquisition, NetNut had contributed $119 thousand to the revenue of Safe-T and had increased loss from continuing operations of Safe-T by $73 thousand. If the business combination had taken place on 1 January 2019, consolidated pro-forma revenue and loss from continuing operations would have been $2,047 thousand and $6,445 thousand for the 6 months ended 30 June 2019. 

SAFE-T GROUP LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - LOSS PER SHARE:

Basic loss per share is calculated by dividing the loss attributable to Company’s owners by the weighted average number of issued ordinary shares.

The Company adjusts the loss attributable to holders of ordinary shares and the weighted average number of shares in issue, to reflect the effect of all potentially dilutive ordinary shares, as follows:

The Company adds to the weighted average number of shares in issue that was used to calculate the basic loss per share, the weighted average of the number of shares to be issued assuming that all shares that have a potentially dilutive effect would be converted into shares, and adjusts net loss attributable to holders of ordinary Company shares to exclude any profits or losses recorded during the year with respect to potentially dilutive shares.

The potential shares, as mentioned above, are only taken into account in cases where their effect is dilutive (reducing the earnings per share or increasing the loss per share).

SAFE-T GROUP LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - LOSS PER SHARE (continued):

When calculating the diluted loss per share for the six-month period ended June 30, 2019 the Company accounted for the dilutive effect of the derivative financial instruments and the Convertible Debentures for the six- and three-months period. For the six- and three-month period ended June 30, 2018 the Company accounted for the dilutive effect of the anti-dilution mechanism and for the year ended December 31, 2018 the dilutive effect of the derivative financial instruments and anti-dilution mechanism. Other financial instruments were not accounted for when calculating the diluted loss per share since their effect, on a fully diluted basis, is anti-dilutive.

NOTE 10 - SEGMENT INFORMATION:

Management has determined the Company’s operating segments based on the information reviewed by the Company’s chief operating decision maker for the purpose of allocating resources to the segments and assessing their performance. The chief operating decision maker examines the performance of the operating segments based on revenues and adjusted operating profit (loss), which is calculated based on operating profit (loss) before depreciation and amortization and the effects of share-based payment transactions.

As of June 30, 2019, and following NetNut acquisition at June 12, 2019, the Company has two operating segments: The Company, including Safe-T and Safe-T Inc. (collectively - “Safe-T”) and NetNut.

NOTE 11 - SUBSEQUENT EVENTS:

Warrants exercise, Green-Shoe Option exercise and Debenture conversions

On July 22, 2019, the Company signed a Repricing Agreement with the Lenders which in exchange for the exercise of 724,636 Warrants into ADSs, the Company will reduce the exercise price of these Warrants to $1.38 per ADS. The Repricing Agreement was considered as a dilutive issuance, and as a result triggered also the adjustment of the Debenture conversion price and the exercise price of the Warrants to $1.38.

Following the execution of the Repricing Agreement, the Lenders exercised the said Warrants into 724,636 ADSs (representing 28,985,440 ordinary shares of the Company) on July 24, 2019 for consideration of $1 million.

On August 30, 2019, the Company signed an additional Repricing Agreement (the “Additional Repricing Agreement”) with one of the Lenders which in exchange for the exercise of 100,392 Warrants into ADSs, the Company will reduce the exercise price of these Warrants to $0.9961 per ADS. The Additional Repricing Agreement was considered again as a dilutive issuance, and as a result triggered another adjustment of the Debenture conversion price and the exercise price of the Warrants to $0.9961.

Following the execution of the Additional Repricing Agreement, the Lender exercised the said Warrants into 100,392 ADSs (representing 4,015,680 ordinary shares of the Company) on August 30, 2019 for consideration of $0.1 million.

On August 30, 2019, the Company signed a second Securities Purchase Agreement, according to which the Company obtained another convertible loan with one of the Lenders, who exercised his Green-Shoe Option in the amount of $0.4 million. The debentures will have an 18-month term from issuance and bear interest at 8% per annum payable quarterly in cash or ADSs. The debentures conversion price was set at $0.9961 per ADS.

The conversion price of the debentures will be reset, but not below $0.40 per ADS, if there is a subsequent issuance of the Company’s securities below the conversion price, to the price of the subsequent issuance, and the debentures contain other customary anti-dilution features, with the Black-Scholes value of the debentures payable upon the occurrence of a fundamental transaction. The Company can redeem the debentures upon 20 trading days prior notice to the Lenders at 120% of the principal amount of the debentures, plus accrued interest.

The Lender was granted a 12-month participation right in a subsequent financing, up to the amount equal to 50% of the subsequent financing.

During the period from July 1, 2019 to the reporting date, the Lenders were issued 760,738 ADSs upon conversion of Debentures (representing 30,429,520 ordinary shares of the Company).

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