19 August 2021

ETHERNITY NETWORKS LTD

("Ethernity" or the "Company" or the "Group")

Interim results for the six months ended 30 June 2021 and Update

Ethernity Networks Ltd (AIM: ENET.L), a leading supplier of programable networking solutions utilising patented and innovative network processing technology ported on FPGA (field programmable gate array) for virtualised networking appliances, today announces its interim results for the six months ended 30 June 2021 and provides the following Company update.

Ethernity provides innovative, comprehensive networking and security solutions on programmable hardware for accelerating telco/cloud networks. Ethernity's programmable networking solutions that utilise FPGAs, offer 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 NFV (network functions virtualisation).

Financial summary

·    Revenues increased by 165.8% to $955,371 over the comparable period (H1 2020: $359,375)

·    Gross margin increased by 91.1% to $605,852 over the comparable period (H1 2020: $316,982)

·    Gross margin percentage declined to 63.42% (H1 2020: 88.20%) due to increased revenues from product sales with lower margins as opposed to the ~100% margins from licensing and royalties revenues

·    Research and Development, General and Administrative, and Marketing expenses increased by 6.8% over previous period due mainly to return to normal operations from the COVID-19 cut backs

·    EBITDA loss remained consistent with the previous period, increasing by 2.1% to $2,473,686 (H1 2020 comparable adjusted EBITDA loss: $2,422,574)

·    Operating loss increased by 1.0% over the comparable period

·    The cash resources during the period under review were further bolstered following additional investment of £1.8m ($2.5m) from the Share Subscription Agreement and £1.0m ($1.46m),  including support from the Directors, from the exercise of the 30p Warrants originally issued as part of the placing in July 2020.

Company Strategy

The Company is operating in the competitive Telecom industry and is focused on innovative, differentiated offerings related to the 5G router appliance, so as to allow Ethernity to stand out from other standard offerings available in the market. The Directors believe that the current signed contracts and orders received and expected, along with the many other ongoing customer discussions, show that our differentiated, unique and value-added system solutions can capture significant interest in this open RAN market. With our main goal of becoming a supplier of customised and differentiated system solutions as compared to the legacy model of FPGA code licensing, which we have achieved by offering not just the FPGA code, but also the software application and complete system solution, we have elevated our offerings in the value chain. This focused and comprehensive strategy allows us to capture multiple times more revenue per unit as compared to that which can be derived from only selling FPGA code.

Whilst historically most of the Company's principal revenues have been generated from licensing and royalties, in H1 2021, and as evidenced in the results, we saw a change in the mix towards recurrent product revenue streams and the related margin percentages.

With this strategy and our goals of being a solutions provider in mind, the Company intends to focus most of its R&D resources toward delivering complete system solutions as opposed to FPGA code licensing deals, which consume R&D resources but produce only short term revenues and jeopardise our ability to focus on completing the system solutions that are the core of our growth plan.

As we move towards becoming a supplier of system solutions that include FPGA, FPGA routing firmware, add-on differentiated features and complete software applications, during 2021, the Company has not progressed certain FPGA licensing opportunities that are not in line with our system solutions focus. We will continue to focus on opportunities that are aligned with our 5G router activities and its variants, to preserve the R&D resources for future growth versus short-term FPGA code licensing deals.

Operational highlights

During H1 2021 our activities have progressed in multiple domains:

·   With Xilinx, who supply the FPGA device used by Ethernity along with procurement from other sources, we have succeeded in securing supply for the majority of FPGAs required for 2021 so as to fulfill our FPGA SoC orders.

·   $400,000 order received for our ENET FPGA SoC for point to multi-point fixed wireless platforms. Further to this order the Company has received further orders resulting in total orders received to-date of $2.0m. We are hopeful these orders will increase with further engagements through the customer's product deployment and introduction.

·   $2.0m in orders from a Fixed Wireless Access provider to supply the Company's ENET FPGA SoC.

5G and DU Router

The Company is now fully focused on supporting the systems contracts signed for our 5G Router offering including our growing demand for our DU with vRouter offload, that are anticipated to generate the change to being a system solutions provider from 2022 onwards as further detailed below and therefore differentiate this from other licensing activities.

·   5G Router solution:

Ethernity's 5G router offers a unique proposal to the market as it is populated on a programmable platform (FPGA-based) that allows us not only to provide basic routing, but further proposes a differentiated function that provides answers to the ever-changing market requirements without the need to fabricate new hardware based on the same device. This is in alignment with the trend towards virtualisation that utilises programmable CPUs instead of rigid hardware.

By following this strategy the Company has succeeded in capturing significant momentum for its standalone FPGA-based Universal Edge Platform (UEP) as well as for the ACE-NIC for both DU Router-on-NIC and for UPF.

The significant contract signed with an Indian OEM during Q4 2020 was the first system-level contract that included delivery of the complete offering of system ingredients including hardware, FPGA and application software. The Customer has completed fabrication of the first product (UEP-60), and there is growing interest from large service providers for this product. This product will include the same FPGA code and software application save for minor changes in hardware configuration, that is applicable for two larger customer contracts we have, including the new UEP-60 contract of $930,000 signed on 30 July 2021, which includes integrated wireless bonding and more importantly the DU Router-on-NIC. As detailed below, this is the same system offering as in the UEPs, but runs on a standard network adapter server card, allowing the Company to focus its R&D efforts on a singular goal.

·   DU's Router-on-NIC:

o  Ethernity nominated for a GSM GLOMO award, demonstrating our leading technology innovation and differentiated system offerings for the open RAN market and further proving our leadership and positioning in this market.

o  Gained traction from large service providers as the product offers greater savings in both operational expenses and capital expenses. Once used on a DU, it can eliminate the need for an external switch/router required at the DU location for aggregation of other DUs and for network connectivity. Further details can be found in our blog post https://ethernitynet.com/ethernitys-unique-du-proposition/.

o  The Company believes that its vRouter offload for DU that was initially introduced to the market by Ethernity, has the potential to become a standard requirement for large DU open RAN-based deployment.

·   5G router with integrated wireless bonding:

o The Company was granted a patent for a new wireless bonding technology. On a practical level this patent enables Ethernity to overcome operator issues with wireless transmission that is interrupted or slowed due to inclement weather. The primary applications for this patent are SD-WAN and wireless backhaul deployments.

o Furthermore, as highlighted above, the Company announced on 30 July 2021 that it had secured a contract with a customer of $930k for a customised UEP-60 solution incorporating the integrated wireless bonding. The majority of the revenues will be recognised in 2022.

o Following the introduction of the UEP-20 based bonding solution the Company went through different testing and interoperability with radio equipment vendors, and dependent on the vendors' success in selling their radio equipment with our UEP-20 bonding solution for currently deployed radio installations, we currently expect to obtain orders over the next 12 months for our UEP-20 to connect thousands of links, with expected revenues in the range of $800k to $1.0m.

o We are also in ongoing discussions relating to various other UEP customised offerings and further licensing for our software and firmware with other wireless connectivity vendors.

Post-period events

On 30 July 2021 the Company announced a new contract of $930k with an international wireless connectivity vendor to supply its UEP-60 product. Over and above this initial order, there is potential for significant follow-on orders and wider product offerings. This is the second major 5G system contract, following the successful contract with the Indian OEM in Q3 2020, in Ethernity's progression of its transition to a system solutions provider.

Following a delay due to the COVID-19 outbreak in India, fabrication of the UEP-60 product has now been completed by the Indian OEM and was delivered by them to our lab for integration during August 2021. The customer has multiple engagements with operators and government agencies, and subsequent to our delivery and testing of the working product, expects significant deployment from 2022 onwards.

2021 Update and Outlook

The Board remains confident that, on the basis of the current contracts, continued increased customer engagements, focus on delivery of solutions and the anticipated customer deployments now being realised, Ethernity will meet its long-term objectives and is well positioned to become one of the key solutions providers in its marketplace. The Company continues to experience an increase in the outreach by OEMs and operators interested in Ethernity's solutions where these solutions are proving increasingly aligned with operators strategy with their customers in their marketplaces. Network service providers are requiring more flexible solutions to their technology and network needs for offloading support of new data appliances introduced by the market. Ethernity believes it has the best-in-class system solutions to address these needs.

We are pleased to note that the interest for our products is growing, including current discussions with strategic Tier-1 cloud infrastructure suppliers. However, even with orders in place, due to component shortages and the ongoing impact of COVID-19 in the areas where our contracted customers operate (specifically, in India)  resulting in significantly late deliveries by our customers of their fabricated product for integration with our UEP software, which product has now finally been fabricated and delivered to the Company by the customer for integration. In light of these delays, we now expect a delayed deployment from our customers from 2021 to the first half of 2022. As a result of these delays, and the worldwide components shortages, we now expect that approximately $1.0m to $1.5m of anticipated revenues may be pushed from H2 2021 into H1 2022. Furthermore, as we focus on systems solutions in preference to licensing deals not aligned with our product deliveries, we are no longer pursuing certain licensing deals so as to focus our resources on delivering the product solutions, our main growth engine in terms of our contracts and the future product solutions business-based roadmap.

In summary, the business and engagements remain positive and intact, being primarily affected by customer and component delays. With the refocused strategy on product sales,  the Board now expects 2021 full year revenues to be in a range of $3.5m to $4.5m, displaying continued significant growth over the previously reported periods.

During 2022 and beyond, the Company anticipates generating revenues from its DU Router-on-NIC and UPF, with significant year-on-year revenue growth anticipated from product orders and contracts already signed, in particular our long-term contracts for Fixed Wireless Access, UEP-60 (with further potential upside from UEP-20) and our Indian OEM contract, demonstrating positive momentum and growth from product sales. Resulting from the new contracts and orders, and notwithstanding the delays as mentioned above, the Company is satisfied that is has sufficient financial resources to meet its ongoing obligations and operating requirements for 2022.

David Levi, Chief Executive Officer of Ethernity Networks Ltd, commented: 

"The first half results were in-line with our expectations, with a positive mix of product, royalties and licensing revenues. It appears that most of our engaged customers are now returning to more normalised levels of business operations and are finalising their development of new products and architecture.  This is expected to lead to demand for our programmable products, and the deal flow forecasts for engagements this year remain intact. We are hopeful that these will continue to be concluded during H2 2021.

We are pleased to be continuing the evolution of the Company, with our strategy to focus on product and system revenue business versus short term licensing deals that are not in line with our system solutions. We do however foresee that delays in roll-out and deployment in India due to the COVID-19 situation along with the component shortage situation in general required for our UEPs and ACE-NIC product will defer planned Q3 and Q4 2021 revenues into the latter portions of Q1 and Q2 2022.

The product contracts already signed, the product orders received (which are expected to grow), and the good progress with our Indian OEM will all fuel our revenue growth to position us not just as a technology company, but as a validated system product supplier with differentiated offerings, resulting in growing revenue streams that will allow us to be considered for larger scale deployments."

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MARKET ABUSE REGULATION

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014 (as implemented into English Law).  Upon the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

OPERATIONAL and financial REVIEW

Over the past six month reporting period we continued with our goals and to progress our strategic transition towards diversifying  the Company's offerings to include systems solutions in addition to IP licensing and services, and this has been evidenced in the accomplishments and engagements attained over the past year.

During the period under review, the Company delivered revenues of $955,371 (H1 2020: $359,375) and a gross profit of $605,852 (H1 2020 $316,982). Revenues were significantly higher than the comparable period.

The gross profit percentage decline to 63.42%, as opposed to H1 2020 of 88.2%, is as anticipated due to the different product mix within the revenue. In the past design wins and royalty revenue contributed proportionately significantly more to revenues, however the focus on being a solutions provider has resulted in the mix of revenues trending toward the supply of product with lower margins albeit higher unit sales values.

EBITDA

EBITDA, albeit it not a recognised reportable accounting measure, provides a meaningful insight into the operations of a business when removing the non-cash or intangible 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 period under review for the 6 months ended 30 June 2021 is presented as follows:

EBITDA loss in the first six months of the year was $2,473,686 (H1 2020 loss: $2,422,574), which has remained consistent with the previously reported comparable period. This loss is impacted by the reduced margin percentage. As previously stated, the margin percentage is a direct result of the revenues mix and it is anticipated that the current margin percentage levels will continue.

Operating Costs

Operating expenses (before amortisation and depreciation), increased by 6.7% in the current period against the same period in 2020 from $2,739,556 to $3,100,340 mainly within the R&D division as operating levels normalised to the pre COVID-19 levels and staff attendance returned to 100%.

General and Administration costs have also returned to normal levels as staff returned from furlough, one off COVID-19 cost reductions were no longer applicable and employee salaries returned to 100% levels.

The decline in the Marketing expenses are a direct result of the reduction in physical marketing activities and attendance at worldwide conferences and exhibitions.

After adjusting for the capitalised Research and Development Costs, amortisation costs of the Development Intangible asset, Depreciation and Share Based Compensation adjustments, the resultant increases (decreases) in Operating costs, as adjusted would have been:

Summarised trading results

Revenue Analysis

Revenues for the 6 months ended 30 June 2021 increased by 165.8% to $955,371 (2020: $359,375). This result is a positive reflection of the upward trend anticipated due to the increased customer engagements and contacted demand and deployment of the Company's solutions.

The revenue mix will continue to evolve as the Company progresses in achieving the desired mix of the revenue streams from network solutions in addition to IP licenses and services.

Segment Reporting

The geographic mix is represented by the makeup of the products supplied, where in the first half of the current financial year the revenues were weighted towards foreign design wins while royalty revenues were earned in Israel. The trend is expected to continue during the second half of the year as design wins and product supply focussing on the Tier-1 OEMs outside of Israel continues to grow.

Margins

Gross margins were line with Company expectations based on the product sales strategy focus, with the 2021 gross margin for the period being 63.4% as compared to 88.2% in the same period for 2020. As always, the gross margin will vary according to the revenue mix.

As the revenue mix as noted above evolves, this will have a downward pressure on gross margin percentages as revenues from ~100% margin sources become less prominent in the mix, being replaced by cost active product sales.

Financing Costs

As noted in the Annual Results for the year ended 31 December 2020, the significant increase in financing costs has come about due to the two equity events referred to below and under the section "Balance Sheet".

It is to be noted that these two equity events, albeit 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, albeit that it is not based on the actual cash cost of the financing arrangements to the Company, is significantly complex in its application, forces the recognition of the fair value of the equity issues, and essentially creates a recognition in differences between the market price of the shares issued at time of issue versus the actual price at which the equity is allotted. It is not a reflection of the cash inflows and outflows of the transactions. 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 two fundraise deals the Company completed during the year of 2020 being;

a.   Issuance of the Share and Warrants bundle (Peterhouse Capital Limited)

b.  Share Subscription Agreement (5G Innovation Leaders Fund)

It has been determined that in terms of IFRS-9, both 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 both cases the equity differential based on allotment price and fair value at time of allotment charges to the income statement.

The liability in respect of deal a. above represents the outstanding 30p Warrants which had not been exercised as of 31 December 2020 and were finalised and closed by the end of May 2021.

The liability in respect of deal b. represents the cash advances the Company has received during 2020 and to 30 June 2021 and as of 30 June 2021 still has not allotted shares against the advances in settlement of the debt.

The above outlined treatment results in a significant finance expense charged to the Income Statement, however it should be noted that the expense is not an actual cash expense, rather an expense due to the accounting treatment and recognition of an expense instead of an asset in terms of IFRS guidance.

The Finance income is the mirror image to the above and relates to the 880,000 "Allotment Shares" the Company issued in advance as part of the Share Subscription Agreement, the cash payment for which the Company received in April of 2021 being £256,766 ($356,443). The increase in value of the asset, being the increase in the value of the Allotment Shares at the time of allotment versus the value at settlement date is recognised as finance income in the Income Statement.

The Financing Expenses and Finance Income in the Income Statement are thus summarised as follows:

The cash resources during the period under review were further bolstered following further investment from the Share Subscription Agreement of £1.8m (approximately $2.5m) and the successful completion and closing from the July 2020 Placing of the 30p Warrants in May 2021 raising £1.05m (approximately $1.45m) including support from the Directors

COVID-19 Impact and Going Concern

Currently, with the impact of COVID-19 in Israel having been reduced significantly the Company has resumed its planned strategies including the enhancement of the development resources. We remain acutely aware of COVID-19 showing not only increases in Israel but the situation in the geographies that we trade and have development engagements, specifically in India and Taiwan, and as such realise the risk of an impact in delays in the timing of revenues as well as delays in supplies not only to the Company but its customers, whose product deployment could be materially impacted. Without modifying their opinion of the Company remaining a going concern, the Directors, following good practice reporting from the previously audited financial statements, make reference to the existence of a material uncertainty in relation to going concern, drawing attention to Note 3 of the Interim Unaudited Financial Statements enclosed in this announcement.

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 Interim Unaudited Financial Statements presented below.

FORWARD LOOKING STATEMENTS

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". By their nature, forward-looking statements involve risk and uncertainty since they relate to future events and circumstances. Actual results may, and often do, differ materially from any forward-looking statements. Any forward-looking statements in this announcement reflect Ethernity's view with respect to future events as at the date of this announcement. Save as required by law or by the AIM Rules for Companies, Ethernity undertakes no obligation to publicly revise any forward-looking statements in this announcement, following any change in its expectations or to reflect events or circumstances after the date of this announcement.

By order of the Board

Mark Reichenberg

Company Secretary

19 August 2021

Interim Unaudited Financial Statements

as at 30 June 2021

STATEMENTS OF FINANCIAL POSITION

The accompanying notes are an integral part of the interim financial statements.

STATEMENTS OF COMPREHENSIVE LOSS

The accompanying notes are an integral part of the interim financial statements.