20 September 2023

ETHERNITY NETWORKS LTD

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

Interim results for the six months ended 30 June 2023

Ethernity Networks Ltd (AIM: ENET.L; OTCMKTS: ENETF), a leading supplier of networking processing semiconductor technology ported on field programmable gate arrays ("FPGAs") for virtualised networking appliances, announces its interim results for the six months ended 30 June 2023.

Financial summary

·   Revenues increased by 98% to $1,398,871 (H1 2022: $704,853).

·  Gross profit increased by 87% to $802,494 over the comparable period (H1 2022: $428,761), and an underlying gross profit of $996,031 without the non-recurring IFRS impairment which reflects an increase of 132% vs H1 2022.

·  Gross margin of 57.37% (H1 2022 60.83%) and an underlying gross margin of 71.2% without the non-recurring IFRS impairment.

·   Net comprehensive loss for the period increased by $111,716 to $3,614,449 (H1 2022: $3,502,733). This is due to IFRS finance income recognized in H1 2022 in respect of the fundraising undertaken in that period.

·   Research and Development, General and Administrative, and Marketing expenses (before amortisation, depreciation and IFRS adjustments) decreased overall by 3%.

·    Adjusted EBITDA loss decreased by 19% to $3,045,037 (H1 2022: $3,782,342).

Current trading

The Company is targeting the achievement of positive cash flow generation from operations during the second half of 2023 by continuing to fulfill customers' orders and from anticipated revenue from new contracts, in combination with a reduction in expenses. The Company anticipates that revenue growth will be achieved as a result of the modified business model which focuses on the licensing of data processing, passive optical network ("PON") and software technology.

As of today, 950,000 platforms have been deployed with the ENET data processing technology, in various types of platforms including Carrier Ethernet Demarcation devices, wireless backhaul, cellular base stations, Broadband fiber and DSL platform, Broadband fix wireless platforms and aerospace aviation platforms. The Company continues to generate steady revenue from existing customers in all the above fields.

Recently, after immense efforts and logistics, the Company's U.S. based Tier 1 Aerospace client received U.S. Government approval to work with the Company on a military project that is based on the ENET Data processor adapted for the aviation market.

Additionally, the Company has expanded the offering of its standard ENET data processing solution with a network operating system that delivers a complete software stack for system operation. This expansion provides an opportunity for revenue growth and an increase in gross margin for each delivery of an ENET Flow processor. It also allows the Company to expand its customer base among those that do not obtain the complete software capabilities for networking functions to deliver customized FPGAs, customized FPGA based systems, or customized eASIC for medium volume platforms.

Company Strategy

Ethernity's data processing and PON firmware and software can be ported into AMD's low-cost FPGA, Microchip's FPGAs, Intel's FPGAs or Intel's eASIC, dependent on the application, the platform and the volume of the business, for use in mass production with customized features. The ASIC process requires large investment, however the same Firmware that runs on a FPGA can be repurposed for a reduced cost through an eASIC, which requires c. 20% of the investment needed for fabricating a pure ASIC and has a significantly shorter time to market. Therefore, the eASIC can be used for medium volume markets, such as telecom equipment, and provides a considerably lower cost and lower power option than an FPGA. Furthermore, for large volume markets such as Residential Gateways Customer Premises Equipment ("CPE") devices that represents a market of tens of millions of units a year, the ENET Data processing and PON firmware can be utilized on pure ASIC to capture the right price for customer located devices.

The Company's PON technology spans into different market segments including Fiber-To-The-Room, PON Optical Line Terminal ("OLT") Sticks that utilize PON OLT MAC within optical transceiver, remote OLTs with main requirements to support Combo PON, that essentially runs 10G PON and legacy Giga Bit PON ("GPON") over single fibre, and traditional OLTs with multiple PON ports that will be severed by an eASIC process. Furthermore, the Company plans further PON business expansion with 25Gbps PON and 50Gbps PON.

The business model for both the PON and the ENET Flow processor is based on licensing the technology to be implemented on FPGA or eASIC, along with an associated software package, which lowers the time to market for the customers and reduces the time it takes for Ethernity to earn revenue.

The combination of this model of delivering our solution on FPGA for unique and customized platform or an eASIC offering for larger volume markets, should allow the Company to generate cash with higher profit margins, and position the Company as a semiconductor and software provider, offering customized semiconductor solution ported on FPGA/eASIC based devices or a complete system for the telecom access market that will utilize the Company's intellectual property and software framework, to secure the future growth of the Company focusing on its strengths.  

Half Year Review

Operational highlights

During the first six months of 2023, development was completed on several critical products and solutions including the XGS-PON, GPON and UEP2025 with wireless link bonding. These products and solutions are currently in discussion, testing and evaluation with customers and are targeted to generate licensing revenues and NRE for customised product developments.

The completion of the first release of the UEP-2025 product, the XGS-PON OLT, and fiber-to-the-room ("FTTR") OLT development has enabled the Company to maintain reduced R&D staff while still pursuing future revenue opportunities with these products and technologies.

During H1 2023, the Company's activities have progressed in multiple domains:

·    First release of the UEP bonding product delivered to our existing bonding OEM customer who intends to complete its product for integration during Q4/23.

·    We completed development of the XGS-PON OLT firmware ported onto our Asian vendor's XGS-PON OLT platform, which embeds Ethernity's XGSPON MAC FPGA SoC.

·    Completion of the FTTR gateway - we expect delays in deployment by the customer due to the customer's own constraints, and therefore FTTR revenues for the current year from the customer are uncertain.

·    Received a purchase order for $1.5 million from our existing fixed wireless customer to supply the Company's data processing system-on-chip (SoC) in staged deliveries during Q2 and Q3 2023.

Outlook

With the modified business model, the Company anticipates it will be able to accelerate growth from its software operation stack, FPGAs, and future eASIC based engagements. This, together with and reduction in costs already implemented, will contribute towards the Company's ability to generate cash for future expansion.

In parallel to the Company's existing FPGA business and the progress with existing customers, the Company is in discussions to expand its UEP-2025 link bonding offering with potential new OEM customers.

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

"While it is a challenging period due to the global financial situation, I am encouraged by the fact that there is demand for our PON offerings that have captured interest from larger corporations, and I am hopeful that, with the cost reductions implemented and the modified business plan, engagement in multiple design wins for our PON technology will fulfil our further anticipated growth."

For further information, please contact:

MARKET ABUSE REGULATION

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse (amendment) (EU Exit) Regulations 2019/310 ("MAR"). With 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

During the period under review, the Company delivered revenues of $1,398,871 (H1 2022: $704,853), an increase of 98% over H1 2022.

The underlying gross profit increased to $996,031 (H1 2022: $428,761), and the underlying gross margin increased to 71.2% (H1 2022: 60.83%). However, due to a non-recurring IFRS raw material inventory impairment charge of $194K, which the Company recorded in H1 2023, the gross profit and gross margin have been reduced to $802,494 and 57.37% respectively.

EBITDA

The EBITDA for the six months ended 30 June 2023 is presented as follows:

Adjusted EBITDA loss in the first six months of the year decreased by 19% to $3,045,037 (H1 2022: $3,774,364). This decrease in adjusted EBITDA loss is attributed to the cost savings steps the Company took in its efforts to control spending and to progress towards generating positive cash flow. These steps, together with the significant increase in reported revenues of $1,398,871 vs. H1 2022 revenues of $704,853, resulted in the above-mentioned decrease in the EBITDA loss and adjusted EBITDA loss. The gross margin is a direct result of the revenue mix and it is anticipated that the current margin level will continue.

Operating Costs

Operating expenses (before amortisation, depreciation and IFRS adjustments) decreased by 4% from $4,203,125 to $4,041,068 during the period against the same period in 2022.

Within the R&D division, the Company has cut operating expenses with further cost cuts coming into effect during July and August. The impact of the cost savings attributed to the above cuts will be visible in the 2023 full year figures.

General and Administration costs (before amortisation, depreciation and IFRS adjustments) have not materially changed, however G&A cost will be reduced during second half of 2023.  

The decrease in Marketing expenses (before amortisation, depreciation and IFRS adjustments) is attributed to headcount cuts in the department and further costs reduction will be visible during H2 2023.  

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

Summarised trading results

Revenue Analysis

Revenues for the six months ended 30 June 2023 of $1,398,871 (2022: $704,853) are influenced by the timing of deliveries which is dependent on the terms of the various contracts and orders.

The revenue mix will continue to evolve as the Company progresses, however with the new business model based on licensing of FPGA and ASICs, and projects involved in delivering systems which are based on the Company's IP, the Board anticipates that gross margin should improve.

Segment Reporting

The geographic mix is represented by the makeup of the products supplied, and the main increase in revenues is attributed to sales to the Company's U.S. based customers.

Financing Costs

As noted in the Annual Results for the year ended 31 December 2022, the majority of the financing expenses and income relate to the various fundraise deals the Company has executed.

It is to be noted that these 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 2022 and the first half of 2023 being;

a.      Share Subscription Agreement (5G Innovation Leaders Fund) in February 2022

b.                      Issuance of the Share and Warrants bundle in January 2023 and May 2023

It has been determined that in terms of IFRS-9, part of these transactions is to be recognised as equity and part as 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 Financing Expenses and Finance Income in the Income Statement that relate to the above-mentioned transactions are thus summarised as follows:

Going Concern

Based on the major cut in expenses and the modified business model, licensing discussion and negotiations with major Telecom manufacturers, and in the light of enquiries made by the Directors as to business status  of the Company, as well as bearing in mind the ability and success of the Company to raise funds previously, the Directors have a reasonable expectation that the Company will have access to adequate resources to continue in operational existence for the foreseeable future and therefore have adopted the going concern basis of preparation in the financial statements.

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

Ayala Deutsch

VP Finance

20 September 2023

Interim Unaudited Financial Statements

as at 30 June 2023

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.