Payton Planar — Interim / Quarterly Report 2014

Nov 24, 2014

Payton Planar Magnetics Ltd. and its Consolidated Subsidiaries Financial Statements September 30, 2014 (Unaudited)

Contents

	Page
Board of Directors Report	2
Review Letter	8
Condensed Consolidated Interim Financial Statements:
Statement of Financial Position	9
Statements of Comprehensive Income	11
Statements of Changes in Equity	12
Statements of Cash Flows	14
Notes to the Consolidated Interim Financial Statements	15

The Board of Directors' Report¹ on Corporate Affairs

We are pleased to present the Board of Directors' report on the affairs of Payton Planar Magnetics Ltd. and its consolidated subsidiaries

for the nine months ended on September 30, 2014.

Notice: This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of the Management of the Company as well as assumptions made by and information currently available to the Management of the Company. Such statements reflect the current views of the Company with respect to future events. Management emphasizes that the assumptions do not in any way imply commitment towards realization. The outcome of which is subject to certain risks and other factors, which may be outside of the Company's control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as projected, anticipated, believed, estimated, expected or intended.

Reference in this report to forward looking statements shall be by stating that such information is given by way of estimation, evaluation, assessment, intentions, expectations, beliefs and similar terms, but it is possible that such information shall be given under other phrases.

1. A concise description of the corporation and its business environment

A. The Group

Payton Planar Magnetics Ltd. ("the Company") and its consolidated subsidiaries: Payton America Inc. ("Payton America"), Himag Planar Magnetics Ltd. ("Himag") and Payton Planar Holdings (1996) Ltd. ("Payton Holdings").

B. The Group's main fields of activity and changes that occurred in the period from January to September 2014

The Company, an Israeli high-tech enterprise, develops manufactures and markets Planar and Conventional transformers worldwide. The Company was founded in order to revolutionize the traditional approach to the design and manufacture of transformers through the concept of planar transformers. The Company completed its initial public offering in 1998 on the Euronext Stock Exchange.

No material changes occurred during the period from January 1st to September 30th, 2014.

C. Principal customers

The consolidated sales revenues include sales to major customers (which make up in excess of 10% of the sales of the Group).

	For the nine-month	For the year ended	For the nine-month
	period ended	December 31	period ended
	September 30		September 30
	2014	2013	2013
Customer A	12.8%	*	*

* Less than 10% of the Group's consolidated sales.

¹ The financial statements as at September 30, 2014 form an integral part thereof.

D. Marketing

The Group is participating in most leading electronic exhibitions. During 2014 the Group participated in

• APEC in Dallas, USA (March, 2014), 2014, PCIM Europe 2014 Exhibition, Nuremberg, Germany (May, 2014), New-Tech Exhibition, Tel-Aviv, Israel (May, 2014), Electronica Exhibition, Munich, Germany (November, 2014) and others.
• In addition, during 2014, the Company initiated several seminars and conferences in the USA.

E. Order Backlog

The Group's order backlog as of September 30, 2014 totaled USD 10,783 thousand (December 31, 2013 - USD 9,408 thousand). The backlog is composed only of firm orders.

Management estimates that most of the backlog as of 30.9.14 will be supplied until June 30, 2015.

2. Financial position

A. Statement of Financial Position as at September 30, 2014

Cash and cash equivalents, Marketable securities held for trading and Short-term Deposits - these items amounted to a total of USD 16,066 thousand as at September 30, 2014 compared to USD 12,996 thousand as at December 31, 2013 and USD 15,966 thousand as at September 30, 2013. It is noted that, deposits at the amount of USD 1,001 thousand, as at September 30, 2014 and USD 3,002 thousand, as at December 31, 2013, were classified as Long-term deposits, and as such presented under the non-current assets.

The increase in these items, during the first nine months of 2014, is explained mostly by the profit for the period.

Current tax assets - these amounted to USD 147 thousand as at September 30, 2014, compared to USD 500 thousand as at December 31, 2013 and USD 263 thousand as at September 30, 2013. The decrease in this item resulted mainly from tax asset refund made during the second quarter of 2014.

Inventory - amounted to USD 3,836 thousand as at September 30, 2014, compared to USD 3,218 thousand as at December 31, 2013 and USD 3,288 thousand as at September 30, 2013. The increase in this item resulted mainly from the growth in the Group's activity volume and backlog during 2014 (see 1E above).

Liabilities to bank and others (Non-current Liabilities) - amounted to USD 2,691 thousand as at September 30, 2014 compared to USD 3,061 thousand as at December 31, 2013 and USD 3,009 thousand as at September 30, 2013. The decrease in these items, during the first nine months of 2014, is explained mainly by monthly repayments of the bank loan, and a payment made against contingent consideration of Himag Solutions purchase.

Employee benefits (Non-current Liabilities) - amounted to USD 630 thousand as at September 30, 2014 compared to USD 495 thousand as at December 31, 2013 and USD 455 thousand as at September 30, 2013. As at June 30, 2014 the value of these liabilities was incresed by USD 125 thousand due to a decrease in their discount rate which is based on the interest rate of long term Government bonds.

Correspondingly, the net effect (after tax), was recorded in other comprehensive income and amounted to USD 100 thousand.

B. Operating results

Summary of Consolidated quarterly Statements of Income US Dollars in thousands

Payton Planar Magnetics Ltd.

Consolidated Income Statements

	Quarter 7-9/14	Quarter 4-6/14	Quarter 1-3/14	Quarter 10-12/13	Quarter 7-9/13
Sales revenues	6,223	5,866	5,295	5,301	5,608
Cost of sales	4,133	3,682	3,576	3,762	3,715
Gross profit	2,090	2,184	1,719	1,539	1,893
Development costs	(222)	(278)	(226)	(217)	(222)
Selling & marketing expenses	(464)	(526)	(514)	(438)	(478)
General & administrative expenses	(786)	(723)	(689)	(743)	(700)
Other expenses	(2)	(2)	-	(253)	(77)
Operating income (loss)	616	655	290	(112)	416
Finance (expenses) income, net	(88)	(18)	(11)	33	34
Profit (loss) before income taxes	528	637	279	(79)	450
Income taxes	(91)	(128)	(50)	52	(81)
Net profit (loss) for the period	437	509	229	(27)	369
Other comprehensive loss items that will not be transferred to profit &loss
Remeasurement of defined
benefit plan	-	(100)	-	(19)	-
Total other comprehensive loss	-	(100)	-	(19)	-
Total comprehensive income
(loss) for the period	437	409	229	(46)	369

General Note: The Group is exposed to erosion of the USD in relation to the NIS and to the Euro. Most of the Company's salaries and other operating costs are fixed in NIS. Revaluation of the local Israeli currency drives to an increase in labor costs and other operating costs, thus, negatively affects the operating results of the Company. The average rate of the USD with relation to the NIS in the first nine months of 2014 went down by 4.0% compared to average rate of the first nine months of 2013 and went down by 3.3% compared to average rate of year 2013. The decrease in this rate reflects an increase in the above-mentioned costs when they are presented in USD.

(The average rate of the USD with relation to the NIS in the third quarter of 2014 went up by 1.5% compared to average rate of the second quarter of 2014).

Sales revenues - The Group's sales revenues for the nine-month period ended September 30, 2014 were USD 17,384 thousand compared with USD 14,720 thousand in the nine-month period ended September 30, 2013 (increase of 18.1%). Sales revenues in the third quarter of 2014 were USD 6,223 thousand compared with USD 5,608 thousand in the third quarter of 2013 (increase of 11.0%). The increase in sales in 2014 was mainly as a result of the ramp up of a few maturing projects.

Gross profit - The Group's gross profit for the nine-month period ended September 30, 2014 amounted USD 5,993 thousand (34% of sales) compared with USD 4,626 thousand (31% of sales) in the nine-month period ended September 30, 2013. The Group's gross profit for the three-month period ended September 30, 2014 amounted USD 2,090 thousand (34% of sales) compared with USD 1,893 thousand (34% of sales) in the three-month period ended September 30, 2013

The increase in the gross profit relates mainly to the growth in sales (since part of the expenses included in the cost of sales are fixed and did not increase) and to the products mix sold during each quarter.

Selling & marketing expenses - The Group's selling & marketing expenses are mainly comprised of: (1) commissions to the Group's reps' and Marketing Personnel, which are calculated as a portion of sales and of (2) other selling expenses (fixed) based on management policy. The Group's marketing efforts are concentrated through participation in major power electronic shows around the world and by collaborating with its worldwide rep's Network.

The Group's Selling & marketing expenses for the nine months ended September 30, 2014 amounted to USD 1,504 thousand compared with USD 1,494 thousand in the nine months ended September 30, 2013.

General& Administrative expenses - The Group's General & Administrative expenses for the nine months ended September 30, 2014 amounted to USD 2,198 thousand compared with USD 2,061 thousand in the nine months ended September 30, 2013. The increase in these expenses relates mainly due to increase in depreciation cost of the new facility and due to management incentives derived from the Group's improved profitability.

Other expenses, net - Other expenses for the nine months ended September 30, 2013 amounted to USD 222 thousand (USD 4 thousand for the nine months ended September 30, 2014). An amount of USD 206 thousand out of these expenses arising from the transfer to the new facility last year in May 2013.

Finance expenses, net - Finance expenses for the nine months ended September 30, 2014 amounted to USD 117 thousand compared with finance income of USD 102 thousand in the nine months ended September 30, 2013. The increase in these expenses relates mainly to the erosion of the USD in relation to the NIS, Euro(€) and Pound(£).

3. Liquidity

A. Liquidity Ratios

Payton Planar Magnetics Ltd. Consolidated financial ratios
	September 30, 2014	December 31, 2013	September 30, 2013
Current ratio2	5.76	5.16	5.33
Quick ratio3	4.87	4.38	4.61

The following table presents the financial ratios in the Statement of Financial Position:

B. Operating activities

Cash flows generated from operating activities for the nine-month period ended September 30, 2014 amounted USD 1,952 thousand, compared with cash flows generated from operating activities at the amount of USD 892 thousand for the nine-month period ended September 30, 2013. The increase in this cash flows resulted mainly from the profit for the period, from the tax refund and from other changes in the working capital.

C. Investing activities

Cash flows used for investing activities in the nine-month period ended September 30, 2014 amounted USD 1,903 thousand, compared with USD 722 thousand in the nine-month period ended September 30, 2013. During the first nine-months of 2014 the cash flows were used for investment in short-term and long-term bank deposits.

D. Financing activities

Cash flows used for financing activities in the nine-month period ended September 30, 2014 amounted USD 407 thousand, compared with USD 235 thousand in the nine-month period ended September 30, 2013. The increase in this item relates mainly to the first payment of the contingent consideration, at the amount of USD 143 thousand, stemming from the purchase of Himag Solutions.

4. Financing sources

The Group financed its activities during the reported periods from its own resources and from a long term bank loan.

² Current ratio calculation – Current assets / Current liabilities

³ Quick ratio calculation – (Current assets – Inventories) / Current liabilities

5. External factors effects

Revaluation/devaluation of the local Israeli currency in relation to the U.S. Dollar leads to an increase/decrease (respectively) in labor costs and other operating costs. Most of the Company's salaries and other operating costs are fixed in NIS, therefore, the operating results of the Company are being affected.

Devaluation of the Euro(€) and Pound(£) in relation to the U.S. Dollar leads to a decrease in Group's assets in those currencies.

To the best of the Board of Directors' and management's knowledge, except the above mentioned, there have been no significant changes in external factors that may materially affect the Company's financial position or results of operations.

6. Statement by senior management in accordance with article 12, § 2 (3°) of the Royal Decree per 14.11.2007

Pursuant to article 12 § 2(3°) of the Royal Decree of 14 November 2007, David Yativ Chairman of the Board of Directors declares, on behalf of and for the account of Payton Planar Magnetics that, as far as is known to him,

• a) The financial statements at September 30, 2014 are drawn up in accordance with IFRS and with IAS 34 "Interim Financial Reporting" as adopted by the European Union and present a true and fair view of the equity, financial situation and results of the company.
• b) The report gives a true and fair view of the main events of the first nine months of year 2014, their impact on the financial statements, the main risk factors and uncertainties for the remaining months of the financial year, as well as the main transactions with related parties and their possible impact on the abbreviated financial statements.

The Company's Board of Directors wishes to thank our shareholders for their continuance trust and belief.

The Company's Board of Directors wishes to extent its sincere thanks to the entire personnel for their efforts and contribution to the Group's affairs.

Ness Ziona, November 24, 2014.

David Yativ Chairman of the Board of Directors

Doron Yativ Director and C.E.O.

KPMG Millennium Tower Fax 972 3 684 8444 17 Ha'arba'a Street, PO Box 609 Internet www.kpmg.co.il Tel Aviv 61006 Israel

Somekh Chaikin Telephone 972 3 684 8000

Review Report to the Shareholders of Payton Planar Magnetics Ltd.

Introduction

We have reviewed the accompanying financial information of Payton Planar Magnetics Ltd. and its subsidiaries comprising of the condensed consolidated interim statement of financial position as of September 30, 2014 and the related condensed consolidated interim statements of comprehensive income, changes in equity and cash flows for the nine and three-month periods then ended. The Board of Directors and Management are responsible for the preparation and presentation of this interim financial information in accordance with IAS 34 "Interim Financial Reporting". Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review nothing has come to our attention that causes us to believe that the accompanying financial information was not prepared, in all material respects, in accordance with IAS 34 "Interim Financial Reporting".

Somekh Chaikin Certified Public Accountants (Isr.) (A Member of KPMG International)

November 24, 2014

Condensed Consolidated Interim Statement of Financial Position as at

	September 30 2014	September 30 2013	December 31 2013
	(Unaudited)	(Unaudited)	(Audited)
	\$ thousands	\$ thousands	\$ thousands
Current assets
Cash and cash equivalents	5,448	7,671	5,883
Short-term deposits	10,203	7,321	6,133
Marketable securities held for trading	415	974	980
Trade accounts receivable	4,379	4,412	4,030
Other accounts receivable	367	528	447
Current tax assets	147	263	500
Inventory	3,836	3,288	3,218
Total current assets	24,795	24,457	21,191
Non-current assets
Long-term deposits	1,001	-	3,002
Fixed assets	12,176	12,747	12,583
Intangible assets	1,039	1,157	1,134
Deferred taxes	98	145	160
Total non-current assets	14,314	14,049	16,879

Total assets	39,109	38,506	38,070

David Yativ Doron Yativ Michal Lichtenstein Chairman of the Board of Directors Chief Executive Officer V.P. Finance & CFO

Date of approval of the Interim Financial Statements: November 24, 2014

Condensed Consolidated Interim Statement of Financial Position as at (cont'd)

	September 30 2014	September 30 2013
	(Unaudited)	(Unaudited)	(Audited)
	\$ thousands	\$ thousands	\$ thousands
Liabilities and equity
Current liabilities
Liabilities to bank and others	501	412	503
Trade payables	2,445	2,561	2,351
Other payables	1,004	1,272	903
Employee benefits	354	342	348
Total current liabilities	4,304	4,587	4,105
Non-current liabilities
Liabilities to bank and others	2,691	3,009	3,061
Employee benefits	630	455	495
Total non-current liabilities	3,321	3,464	3,556
Equity
Share capital	4,836	4,836	4,836
Share premium	8,993	8,993	8,993
Retained earnings	17,655	16,626	16,580
Total equity	31,484	30,455	30,409
Total liabilities and equity	39,109	38,506	38,070

Condensed Consolidated Interim Statements of Comprehensive Income

	For the nine months ended September 30		For the three months ended September 30	Year ended December 31
	2014	2013	2014	2013	2013
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Audited)
	\$ thousands	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Revenues Cost of sales	17,384 (11,391)	14,720 (10,094)	6,223 (4,133)	5,608 (3,715)	20,021 (13,856)
Gross profit	5,993	4,626	2,090	1,893	6,165
Development costs Selling and marketing	(726)	(696)	(222)	(222)	(913)
expenses General and administrative	(1,504)	(1,494)	(464)	(478)	(1,932)
expenses	(2,198)	(2,061)	(786)	(700)	(2,804)
Other expenses, net	(4)	(222)	(2)	(77)	(475)
Operating profit	1,561	153	616	416	41
Finance income	98	187	29	82	261
Finance expenses	(215)	(85)	(117)	(48)	(126)
Finance (expenses)
income, net	(117)	102	(88)	34	135
Profit before income
taxes	1,444	255	528	450	176
Income taxes	(269)	(115)	(91)	(81)	(63)
Profit for the period	1,175	140	437	369	113
Other comprehensive loss items that will not be transferred to profit and loss Remeasurement of defined
benefit plan	(100)	-	-	-	(19)
Total other comprehensive loss	(100)	-	-	-	(19)
Total comprehensive income for the period	1,075	140	437	369	94
Basic earnings per ordinary share (in \$)	0.07	0.01	0.02	0.02	0.01

Condensed Consolidated Interim Statement of Changes in Equity

	Share capital		Share	Accumulated
	Number of shares	\$ thousands	premium \$ thousands	earnings \$ thousands	Total \$ thousands
For the nine months ended September 30, 2014 (Unaudited) Balance at
January 1, 2014 Total comprehensive income for the period	17,670,775	4,836	8,993	16,580	30,409
Profit for the period Other comprehensive loss	- -	- -	- -	1,175 (100)	1,175 (100)
Total comprehensive income for the period	-	-	-	1,075	1,075
Balance at September 30, 2014	17,670,775	4,836	8,993	17,655	31,484
For the nine months ended September 30, 2013 (Unaudited) Balance at
January 1, 2013 Total comprehensive income for the period	17,670,775	4,836	8,993	16,486	30,315
Profit for the period Total comprehensive income for the period	- -	- -	- -	140 140	140 140
Balance at September 30, 2013	17,670,775	4,836	8,993	16,626	30,455
For the three months ended September 30, 2014 (Unaudited)
Balance at July 1, 2014 Total comprehensive	17,670,775	4,836	8,993	17,218	31,047
income for the period Profit for the period	-	-	-	437	437
Total comprehensive income for the period	-	-	-	437	437
Balance at September 30, 2014	17,670,775	4,836	8,993	17,655	31,484

Condensed Consolidated Interim Statement of Changes in Equity (cont'd)

	Share capital			Share Accumulated
	Number of		premium	earnings	Total
	shares	\$ thousands	\$ thousands	\$ thousands	\$ thousands
For the three months ended September 30, 2013 (Unaudited)
Balance at July 1, 2013 Total comprehensive	17,670,775	4,836	8,993	16,257	30,086
income for the period Profit for the period	-	-	-	369	369
Total comprehensive income for the period	-	-	-	369	369
Balance at September 30, 2013	17,670,775	4,836	8,993	16,626	30,455
For the year ended
December 31, 2013 (Audited) Balance at
January 1, 2013 Total comprehensive	17,670,775	4,836	8,993	16,486	30,315
income for the year Profit for the year	-	-	-	113	113
Other comprehensive loss	-	-	-	(19)	(19)
Total comprehensive income for the year	-	-	-	94	94
Balance at
December 31, 2013	17,670,775	4,836	8,993	16,580	30,409

Condensed Consolidated Interim Statements of Cash Flows

	For the nine months ended September 30		For the three months ended September 30		Year ended December 31
	2014	2013	2014	2013	2013
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Audited)
	\$ thousands	\$ thousands	\$ thousands	\$ thousands	\$ thousands
Operating activities
Profit for the period	1,175	140	437	369	113
Adjustments to reconcile profit to net
cash generated from operating activities:
Depreciation and amortization	760	548	259	211	846
Income taxes	269	115	91	81	63
Capital loss on sale of fixed assets	4	16	2	-	47
Increase (decrease) in employee benefits	16	62	(168)	(61)	89
Increase in trade accounts receivable	(349)	(893)	(485)	(231)	(511)
Decrease (increase) in other accounts
receivable	80	(59)	34	(119)	22
(Increase) decrease in inventory	(618)	341	(213)	146	411
Increase in trade payables	295	524	154	274	725
Increase in other payables	101	393	91	266	24
Interest received	55	47	3	19	124
Interest paid	(88)	(44)	(29)	(32)	(83)
Tax paid	(280)	(218)	(97)	(2)	(394)
Tax received	429	-	-	-	-
Changes in the fair value of contingent
consideration	-	-	-	-	222
Finance expenses (income), net	103	(80)	100	(20)	(95)
Cash flows generated from operating activities	1,952	892	179	901	1,603
Investing activities
Proceeds from sale of marketable
securities held for trading	566	205	78	-	205
(Investments in) proceeds from
short-term deposits, net	(1,006)	3,558	(1,000)	(8)	4,693
Investment in long-term deposits	(1,000)	-	(1,000)	-	(3,000)
Investment in fixed assets	(474)	(4,495)	(97)	(553)	(5,048)
Proceeds from sale of fixed assets	11	10	10	-	10
Cash flows used for investing activities	(1,903)	(722)	(2,009)	(561)	(3,140)
Financing activities
Repayment of loan	(264)	(235)	(88)	(88)	(323)
Payment of contingent consideration	(143)	-	-	-	-
Cash flows used for financing activities	(407)	(235)	(88)	(88)	(323)
Net (decrease) increase in
cash and cash equivalents	(358)	(65)	(1,918)	252	(1,860)
Cash and cash equivalents at beginning of the period	5,883	7,684	7,446	7,397	7,684
Effect of exchange rate
fluctuations on cash held	(77)	52	(80)	22	59
Cash and cash equivalents
at end of the period	5,448	7,671	5,448	7,671	5,883

Notes to the Condensed Consolidated Interim Financial Statements

Note 1 - General

Payton Planar Magnetics Ltd. ("the Company") was incorporated in December 1992. In May 2013 the Company moved to its new premises located at 3 Ha'avoda Street, Ness-Ziona. The Company is a subsidiary of Payton Industries Ltd. (the "Parent Company"). Since June 1998, the Company is traded on the Euro NM.

The condensed consolidated interim financial statements of the Group as at September 30, 2014 comprise the Company and its subsidiaries (together referred as the "Group").

The Group develops, manufactures and markets planar and conventional transformers and operates abroad through its subsidiaries and distributors.

Note 2 - Basis of Preparation

A. Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting". They do not include all the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements as at December 31, 2013 (hereinafter "annual financial statements"). These condensed consolidated interim financial statements were authorized for issue by the Company's Board of Directors on November 24, 2014.

B. Use of estimates and judgments

The preparation of interim financial statements in accordance to IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgments made by management in applying the Company's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the annual financial statements, except for the value of the employee benefits non-current liabilities which was updated as at June 30, 2014 by USD 125 thousand due to a decrease in their discount rate which is based on the interest rate of long term Government Bonds. The net effect (after tax) in the amount of USD 100 thousand was recorded in other comprehensive income.

Note 3 - Significant Accounting Policies

A. The accounting policies applied by the Group in these condensed consolidated interim financial statements are the same as those applied by the Group in its annual financial statements.

Notes to the Condensed Consolidated Interim Financial Statements

Note 3 - Significant Accounting Policies (cont'd)

B. New standards and interpretations not yet adopted

(1) IFRS 9 (2014), Financial Instruments

Further to that mentioned in the disclosure on new standards and interpretations not yet adopted in Note 3 of the annual financial statements regarding significant accounting policies, a final version of the standard, which includes revised guidance on the classification and measurement of financial instruments, and a new model for measuring impairment of financial assets has been published. This guidance has been added to the chapter dealing with general hedge accounting requirements issued in 2013.

Classification and measurement

In accordance with IFRS 9 (2014), there are three principal categories for measuring financial assets: amortized cost, fair value through profit and loss and fair value through other comprehensive income.

IFRS 9 (2014) requires that changes in fair value of financial liabilities designated at fair value through profit or loss that are attributable to changes in its credit risk, should usually be recognized in other comprehensive income.

Impairment of financial asset

IFRS 9 (2014) presents a new 'expected credit loss' model for calculating impairment. For most assets, the new model presents a dual measurement approach for impairment: if the credit risk of a financial asset has not increased significantly since its initial recognition, an impairment provision will be recorded in the amount of the expected credit losses that result from default events that are possible within the twelve months after the reporting date.

If the credit risk has increased significantly, in most cases the impairment provision will increase and be recorded at the level of lifetime expected credit losses of the financial asset.

IFRS 9 (2014) is effective for annual periods beginning on or after January 1, 2018 with early adoption being permitted. It will be applied retrospectively with some exemptions.

The Group is examining the effects of IFRS 9 (2014) on the financial statements with no plans for early adoption.

(2) IFRS 15, Revenue from Contracts with Customers

IFRS 15 replaces the current guidance regarding recognition of revenues and presents a new model for recognizing revenue from contracts with customers. IFRS 15 provides two approaches for recognizing revenue: at a point in time or over time. The model includes five steps for analyzing transactions so as to determine when to recognize revenue and at what amount. Furthermore, IFRS 15 provides new and more extensive disclosure requirements than those that exist under current guidance.

IFRS 15 is applicable for annual periods beginning on or after January 1, 2017 and earlier application is permitted. IFRS 15 includes various alternative transitional provisions, so that companies can choose between one of the following alternatives at initial application: full retrospective application, full retrospective application with practical expedients, or application as from the mandatory effective date, with an adjustment to the balance of retained earnings at that date in respect of transactions that are not yet complete.

The Group has not yet commenced examining the effects of adopting IFRS 15 on the financial statements.

Notes to the Condensed Consolidated Interim Financial Statements

Note 4 - Income Taxes

Further to that mentioned in the annual financial statements in Note 21 regarding taxes on income with respect to Amendment 174 to the Income Tax Ordinance (New Version) – 1961 (hereinafter – "the Ordinance"), regarding the non-application of Israeli Accounting Standard No. 29 Adoption of International Financial Reporting Standards (IFRS) when determining the taxable income (hereinafter – "the Temporary Order"), on July 31, 2014 Amendment 202 to the Ordinance was issued, by which the Temporary Order was extended to the 2012 and 2013 tax years, effective retroactively as from January 1, 2012.

Note 5 - Financial Instruments

Fair value

The carrying amounts of financial assets and liabilities, including cash and cash equivalents, trade receivables, other receivables, deposits, trade payables, other payables and liabilities to bank and others are the same or proximate to their fair value.

Fair value hierarchy

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

• Level 1: quoted prices (unadjusted) in active markets for identical instruments.
• Level 2: inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly.
• Level 3: inputs that are not based on observable market data (unobservable inputs).

		September 30, 2014
	Level 1	Level 3	Total
	(Unaudited)	(Unaudited)	(Unaudited)
	\$ thousands	\$ thousands	\$ thousands
Marketable securities held for trading	415	-	415
Contingent consideration liability	-	331	331

	September 30, 2013
	Level 1	Level 3	Total
	(Unaudited)	(Unaudited)	(Unaudited)
	\$ thousands	\$ thousands	\$ thousands
Marketable securities held for trading	974	-	974
Contingent consideration liability	-	207	207

Note 5 - Financial Instruments (cont'd)

	December 31, 2013
	Level 1	Level 3	Total
	(Audited)	(Audited)	(Audited)
	\$ thousands	\$ thousands	\$ thousands
Marketable securities held for trading	980	-	980
Contingent consideration liability	-	438	438

Further to Note 4B to the annual financial statements regarding acquisition of business activity, the fair value of contingent consideration liability is calculated using the income approach based on the expected payment amounts and their associated probabilities (i.e. probability-weighted). The liability is discounted to present value using the market interest rate at the reporting date.

Significant unobservable inputs include the expected annual sales turnover and the discount rate (16.6%). The estimate of fair value will increase as the expected annual sales turnover increases and the discount rate decreases.

As at September 30, 2014 the fair value of the contingent consideration liability has decreased to USD 331 thousand, following a payment of USD 143 thousand referring to year 2013. On the other hand, an increase, that reflects the changes related to the time value of the liability since the date of acquisition, has been recognized as financing expenses in the statement of income, in the amount of USD 36 thousand and USD 13 thousand for the nine-month and three-month periods ended September 30, 2014, respectively.

A change in one of the unobservable inputs will affect the estimated fair value of the contingent consideration liability as of September 30, 2014, as follows:

• 1. A decrease of 5% in the discount rate will cause in an increase of USD 2 thousand.
• 1. An increase of 5% in the expected annual sales turnover will cause in an increase of USD 10 thousand.

A change in these unobservable inputs at the same opposite rate will have the equal but opposite effect on the fair value of the contingent consideration liability.