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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:
EBITDA | US Dollar | Increase | % | ||
For the 6 months ended | 12 months ended 31-Dec | (Decrease) June
| |||
30-Jun | |||||
2023 | 2022 | 2022 | |||
Revenues | 1,398,871 | 704,853 | 2,937,424 | 694,018 | 98% |
COGS | 402,840 | 276,092 | 1,339,096 | 126,748 | 46% |
Inventory impairment | 193,537 | - | - | 193,537 | |
Gross Profit | 802,494 | 428,761 | 1,598,328 | 373,733 | 87% |
Gross Margin % | 57.37% | 60.83% | 54.41% | -3pps | |
Operating Loss | -3,774,255 | -4,478,031 | -8,696,876 | 703,776 | -16% |
Add back Amortisation of Intangible Assets | 480,690 | 480,690 | 961,380 | - | |
Add back depreciation charges on fixed assets | 67,614 | 53,052 | 108,673 | 14,562 | |
Add back IFRS 16 operating leases depreciation net of rent expenses | -46,324 | -501 | -38,567 | -45,823 | |
EBITDA | -3,272,275 | -3,944,790 | -7,665,390 | 672,515 | -17% |
Add back Share based compensation charges | 56,025 | 127,444 | 221,362 | -71,419 | |
Add back impairments | 193,537 | 20,200 | 599,200 | 173,337 | |
Add back vacation accrual charges | -22,324 | 22,782 | 35,646 | -45,106 | |
Adjusted EBITDA | -3,045,037 | -3,774,364 | -6,809,182 | 729,327 | -19% |
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:
Operating Costs
| US Dollar | Increase (Decrease) June |
%
| ||
For the 6 months ended | 31-Dec | ||||
30-Jun | |||||
2023 | 2022 | 2022 | |||
Research and Development Costs net of amortisation, Share Based Compensation, IFRS adjustments and Vacation accruals | 2,727,389 | 2,689,191 | 5,475,581 | 38,198 | 1% |
General and Administrative expenses, net of depreciation, Share Based Compensation, IFRS adjustments, Vacation accruals and impairments | 895,691 | 901,286 | 1,799,794 | -5,595 | -1% |
Marketing expenses, net of Share Based Compensation and Vacation accruals | 417,988 | 612,648 | 1,147,176 | -194,660 | -32% |
Total | 4,041,068 | 4,203,125 | 8,422,551 | -162,057 | -4% |
Summarised trading results
Summarised Trading Results | US Dollar | Increase (Decrease) June
| % | ||
For the 6 months ended | 31-Dec | ||||
30-Jun | |||||
2023 | 2022 | 2022 | |||
Revenues | 1,398,871 | 704,853 | 2,937,424 | -694,018 | 98% |
Gross Profit | 802,494 | 428,761 | 1,598,328 | -373,733 | 87% |
Gross Margin % | 57.37% | 60.83% | 54.41% | 3% | -6% |
Operating Loss | -3,774,255 | -4,478,031 | -8,696,876 | -703,776 | -16% |
Financing costs | -179,529 | -274,565 | -573,388 | -95,036 | -35% |
Financing income (expenses) | 339,335 | 1,249,863 | 1,267,652 | 910,528 | -73% |
Net comprehensive loss for the year | -3,614,449 | -3,502,733 | -8,002,612 | 111,716 | 3% |
Basic and Diluted earnings per ordinary share | -0.03 | -0.05 | -0.11 | -0.02 | -33% |
Weighted average number of ordinary shares for basic earnings per share | 108,252,292 | 75,367,394 | 76,013,296 | |
Revenue Analysis
Revenues for the six months ended 30 June 2023 of $1,398,871 (2022: $704,853) are influenced by the timing of deliveries which is dependent on the terms of the various contracts and orders.
The revenue mix will continue to evolve as the Company progresses, however with the new business model based on licensing of FPGA and ASICs, and projects involved in delivering systems which are based on the Company's IP, the Board anticipates that gross margin should improve.
Segment Reporting
The geographic mix is represented by the makeup of the products supplied, and the main increase in revenues is attributed to sales to the Company's U.S. based customers.
SEGMENT REPORT geographic analysis | | | | | ||
Region | Six months ended 30 June 2023 | Six months ended 30 June 2022 | Year ended | |||
US$ | % | US$ | % | US$ | % | |
United States | 1,193,868 | 85.3% | 512,650 | 72.7% | 2,085,670 | 71.0% |
Israel | 137,912 | 9.9% | 149,403 | 21.2% | 429,954 | 14.6% |
Asia | 54,700 | 3.9% | 42,800 | 6.1% | 290,800 | 9.9% |
Europe | 12,390 | 0.9% | 0 | 0.0% | 131,000 | 4.5% |
Total | 1,398,870 | 100.0% | 704,853 | 100.0% | 2,937,424 | 100.0% |
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:
Financing expenses for the period ended June 30 2023 | ||
01.2023 Placing warrants | $10,096 | Initial expense in respect of warrants issued to broker |
Total | $10,096 | |
Financing income for the period ended June 30 2023 | ||
01.2023 Placing warrants | $105,329 | Finance income in respect of 6p warrants liability adjusted to fair value as of June 30 2023 |
5G Innovation Leaders Fund | $80,034 | Net adjustment to fair value of remaining unsettled share subscription agreement as at June 30 2023 |
Total | $185,363 | |
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
|
|
| US dollars | ||
|
|
| 30 June | 31 December | |
|
|
| 2023 | 2022 | 2022 |
|
|
| Unaudited | Audited | |
ASSETS |
|
|
|
|
|
Current |
|
|
|
|
|
Cash and cash equivalents | | | 136,872 | 4,164,415 | 715,815 |
Trade receivables | | | 1,465,637 | 1,273,328 | 1,299,072 |
Inventories | 5 | | 890,897 | 771,122 | 773,076 |
Other current assets | | | 577,290 | 234,263 | 343,872 |
Current assets |
|
| 3,070,696 | 6,443,128 | 3,131,835 |
|
|
| | | |
Non-Current |
|
| | | |
Property and equipment | | | 891,478 | 800,194 | 810,326 |
Intangible asset | | | 4,982,110 | 5,943,490 | 5,462,800 |
Right-of-use asset | | | 2,658,699 | 2,982,310 | 2,816,641 |
Other long term assets | | | 34,524 | 35,767 | 35,689 |
Non-current assets |
|
| 8,566,811 | 9,761,761 | 9,125,456 |
|
|
| |
|
|
Total assets |
|
| 11,637,507 | 16,204,889 | 12,257,291 |
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
Current |
|
|
|
|
|
Short Term Borrowings | | | 403,492 | 74,286 | 428,935 |
Trade payables | | | 1,010,240 | 739,258 | 785,583 |
Liability related to share subscription agreement | | | 1,510,000 | 2,060,000 | 1,836,555 |
Warrants liability | | | 27,215 | 5,033 | - |
Other current liabilities | | | 1,247,660 | 1,100,706 | 1,121,909 |
Current liabilities |
|
| 4,198,607 | 3,979,283 | 4,172,982 |
|
|
| | | |
Non-Current |
|
| | | |
Lease liability | | | 2,278,634 | 2,625,598 | 2,505,777 |
Non-current liabilities |
|
| 2,278,634 | 2,625,598 | 2,505,777 |
|
|
|
| |
|
Total liabilities |
|
| 6,477,241 | 6,604,881 | 6,678,759 |
|
|
| | | |
Equity | | | | | |
Share capital | | | 38,500 | 21,152 | 21,904 |
Share premium | | | 43,873,332 | 40,402,890 | 40,786,623 |
Other components of equity | | | 1,318,269 | 1,131,473 | 1,225,391 |
Accumulated deficit | | | (40,069,835) | (31,955,507) | (36,455,386) |
Total equity |
|
| 5,160,266 | 9,600,008 | 5,578,532 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
| 11,637,507 | 16,204,889 | 12,257,291 |
The accompanying notes are an integral part of the interim financial statements.
STATEMENTS OF COMPREHENSIVE LOSS
|
|
| US dollars | ||
|
|
| Six months ended 30 June | For the year ended | |
|
|
| 2023 | 2022 | 2022 |
| Note |
| Unaudited | Audited | |
|
|
|
|
|
|
Revenue | 8 | | 1,398,871 | 704,853 | 2,937,424 |
Cost of sales | | | 596,377 | 276,092 | 1,339,096 |
Gross profit | |
| 802,494 | 428,761 | 1,598,328 |
Research and development expenses | | | 3,241,579 | 3,276,067 | 6,618,795 |
General and administrative expenses | | | 926,293 | 1,001,705 | 2,523,916 |
Marketing expenses | | | 408,877 | 629,020 | 1,167,534 |
Other income | | | - | - | (15,041) |
Operating loss |
|
| (3,774,255) | (4,478,031) | (8,696,876) |
|
| |
|
|
|
Financing costs | 6 | | (163,008) | (274,565) | (573,388) |
| | | | | |
Financing income | 7 | | 322,814 | 1,249,863 | 1,267,652 |
| | | | | |
Loss before tax | | | (3,614,449) | (3,502,733) | (8,002,612) |
| | |
|
|
|
Tax expense | | | - | - | - |
| | | | | |
Net comprehensive loss for the period |
|
| (3,614,449) | (3,502,733) | (8,002,612) |
|
|
|
|
|
|
Basic and diluted loss per ordinary share | | | (0.03) | (0.05) | (0.11) |
|
|
|
|
|
|
Weighted average number of ordinary shares for basic and diluted loss per share |
|
| 108,252,292 | 75,367,394 | 76,013,296 |
The accompanying notes are an integral part of the interim financial statements.
STATEMENTS OF CHANGES IN EQUITY
|
| US dollars | |||||||||
| Number of shares |
| Share capital |
| Share premium |
| Other components of equity |
| Accumulated deficit |
| Total equity |
| | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 1 January 2023 (Audited) | 78,084,437 |
| 21,904 |
| 40,786,623 |
| 1,225,391 |
| (36,455,386) |
| 5,578,532 |
Employee share-based compensation | - | | - | | - | | 56,025 | | - | | 56,025 |
Net proceeds allocated to the issuance of ordinary shares | 49,688,097 | | 14,073 | | 2,638,711 | | - | | - | | 2,652,784 |
Shares issued pursuant to share subscription agreement | 6,629,236 | | 1,816 | | 244,705 | | - | | - | | 246,521 |
Expenses paid in shares and warrants | 2,388,771 | | 707 | | 203,293 | | 36,853 | | - | | 240,853 |
Net comprehensive loss for the period | - | | - | | - | | - | | (3,614,449) | | (3,614,449) |
Balance at 30 June 2023 (Unaudited) | 136,790,541 |
| 38,500 |
| 43,873,332 |
| 1,318,269 |
| (40,069,835) |
| 5,160,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 1 January 2022 (Audited) | 75,351,738 |
| 21,140 |
| 40,382,744 |
| 1,004,029 |
| (28,452,774) |
| 12,955,139 |
Employee share-based compensation | - |
| - |
| - |
| 127,444 |
| - |
| 127,444 |
Expenses paid in shares | 37,106 |
| 12 |
| 20,146 |
| - |
| - |
| 20,158 |
Net comprehensive loss for the period | - |
| - |
| - |
| - |
| (3,502,733) |
| (3,502,733) |
Balance at 30 June 2022 (Unaudited) | 75,388,844 |
| 21,152 |
| 40,402,890 |
| 1,131,473 |
| (31,955,507) |
| 9,600,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 1 January 2022 (Audited) | 75,351,738 |
| 21,140 |
| 40,382,744 |
| 1,004,029 |
| (28,452,774) |
| 12,955,139 |
Employee share-based compensation | - | | - | | - | | 221,362 | | - | | 221,362 |
Shares issued pursuant to share subscription agreement | 2,695,593 | | 752 | | 383,733 | | - | | - | | 384,485 |
Expenses paid in shares and warrants | 37,106 | | 12 | | 20,146 | | - | | - | | 20,158 |
Net comprehensive loss for the year | - | | - | | - | | - | | (8,002,612) | | (8,002,612) |
Balance at 31 December 2022 (Audited) | 78,084,437 | | 21,904 | | 40,786,623 | | 1,225,391 | | (36,455,386) | | 5,578,532 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the interim financial statements.
STATEMENTS OF CASH FLOWS
| US dollars | ||
| Six months ended 30 June | Year ended 31 December | |
| 2023 | 2022 | 2022 |
| Unaudited | Audited | |
Operating activities |
|
|
|
Net comprehensive loss for the period | (3,614,449) | (3,502,733) | (8,002,612) |
| | | |
Non-cash adjustments | | | |
Inventory write off | 193,537 | - | - |
Depreciation of property and equipment | 67,614 | 53,052 | 108,581 |
Depreciation of right of use asset | 157,942 | 173,892 | 339,561 |
Share-based compensation | 56,025 | 127,444 | 221,362 |
Amortisation of intangible assets | 480,690 | 480,690 | 961,380 |
Amortisation of liabilities | (140,693) | (206,755) | (396,434) |
Foreign exchange losses on cash balances | 17,328 | 369,053 | 381,480 |
Revaluation of financial instruments, net | (212,120) | (1,149,960) | (984,001) |
Expenses paid in shares and options | 240,853 | 20,158 | 20,158 |
| | | |
Net changes in working capital | | |
|
(Increase) decrease in trade receivables | (166,565) | 272,270 | 246,526 |
(Increase) in inventories | (311,358) | (486,312) | (488,266) |
(Increase) decrease in other current assets | (233,418) | 6,701 | (102,908) |
Decrease in other long-term assets | 1,165 | 3,189 | 3,267 |
Increase in trade payables | 224,657 | 87,500 | 133,825 |
Increase (decrease) in other liabilities | 127,872 | (17,733) | (12,261) |
Net cash used in operating activities | (3,110,920) | (3,769,544) | (7,570,342) |
|
| |
|
Investing activities |
| |
|
Purchase of property and equipment | (148,766) | (193,177) | (258,838) |
Net cash used in investing activities | (148,766) | (193,177) | (258,838) |
| | |
|
Financing activities | | | |
Proceeds from share subscription agreement | - | 2,000,000 | 2,000,000 |
Proceeds allocated to ordinary shares | 2,864,790 | - | - |
Proceeds allocated to warrants | 132,544 | - | - |
Issuance costs | (185,249) | - | (9,952) |
Proceeds from short term borrowings | 956,382 | 100,283 | 527,790 |
Repayment of short-term borrowings | (970,872) | (448,630) | (493,338) |
Repayment of lease liability | (99,524) | (216,288) | (158,849) |
Net cash provided by financing activities | 2,698,071 | 1,435,365 | 1,865,651 |
| |
| |
Net change in cash and cash equivalents | (561,615) | (2,527,356) | (5,963,529) |
Cash and cash equivalents, beginning of year | 715,815 | 7,060,824 | 7,060,824 |
Exchange differences on cash and cash equivalents | (17,328) | (369,053) | (381,480) |
Cash and cash equivalents, end of period | 136,872 | 4,164,415 | 715,815 |
| | | |
Supplementary information: | | | |
Interest paid during the period | 38,499 | 6,049 | 13,321 |
Interest received during the period | 76 | 1,418 | 1,507 |
| | | |
Supplementary information on non-cash activities: | | | |
Shares issued pursuant to share subscription agreement | 246,521 | - | 384,485 |
Expenses paid in shares and warrants | 240,853 | 20,158 | 20,158 |
The accompanying notes are an integral part of the interim financial statements.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
ETHERNITY NETWORKS LTD. (hereinafter: the "Company"), was incorporated in Israel on the 15th of December 2003 as Neracore Ltd. The Company changed its name to ETHERNITY NETWORKS LTD. on the 10th of August 2004.
The Company provides innovative, comprehensive networking and security solutions on programmable hardware for accelerating telco/cloud networks performance. Ethernity's FPGA logic offers complete Carrier Ethernet Switch Router data plane processing firmware, PON MAC firmware 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 different NFV appliances including wireless backhaul with wireless link bonding, 5G UPF, 5G CU and vRouter offload with the current focus on 5G emerging appliances. The Company's customers are situated worldwide.
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
Basis of presentation of the financial statements and statement of compliance with IFRS
The interim condensed financial statements for the six months ended 30 June 2023 have been prepared in accordance with IAS 34, Interim Financial Reporting. The interim condensed financial statements do not include all the information and disclosures required in the annual financial statements in accordance with IFRS and should be read in conjunction with the Company's annual financial statements as at 31 December 2022. The accounting policies applied in the preparation of the interim condensed financial statements are consistent with those followed in the preparation of the Company's annual financial statements for the year ended 31 December 2022.
The interim condensed financial statements for the half-year ended 30 June 2023 (including comparative amounts) were approved and authorized for issue by the board of directors on 19 September 2023.
NOTE 3 - GOING CONCERN
The financial statements have been prepared assuming that the Company will continue as a going concern. Under this assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future unless management intends or has no realistic alternative other than to liquidate the entity or to stop trading for at least, but not limited to, 12 months from the reporting date. The assessment has been made of the Company's prospects, considering all available information about the future, which have been included in the financial budget, from managing working capital and among other factors such as debt repayment schedules. Consideration has been given inter alia to the significant values of funds raised during the year ended 31 December 2022 and to date, the current stage of the Company's life cycle, its losses and cash outflows, including with respect to the development of the Company's products, the expected timing and amounts of future revenues.
As set out in the Company's annual report and the results for the year ended 31 December 2022, the Company is taking careful steps towards generating positive cash flow from its operations during FY2023, which includes a combination of the modified business model to focus on licensing and a reduction in costs. The delays in existing customer contracts, combined with the extended sales cycles being experienced by the Company place significant uncertainty over the Company's ability to achieve the revenues previously targeted for FY2023. Whilst revenue is therefore expected to be lower than previously anticipated, the focus on the higher margin licensing contracts is expected to contribute to an improved gross margin once licensing sales commence and combined with the cost savings, an improved EBITDA.
Based on the above-mentioned description, and in the light of enquiries made by the Directors as to the current liquidity position 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. The directors recognize that their expectations are based on the success of the new business model as well as the Company succeeding to raise funds, however should events occur that could materially impact the forecasts and cashflows of the Company, a material uncertainty remains that may cast a significant doubt on the Company's ability to continue as a going concern and fulfil its obligations and liabilities in the normal course of business in the future.
NOTE 4 - SIGNIFICANT EVENTS
EQUITY RELATED TRANSACTIONS DURING THE ACCOUNTING PERIOD
During the 6 month period ended 30 June 2023, ordinary shares of the Company were issued, as follows:
| Note |
| Number of ordinary shares |
| | | |
Issuance of ordinary shares (issued together with warrants) | [1] | | 49,688,097 |
Shares issued pursuant to share subscription agreement | [2] | | 6,629,236 |
Expenses paid for in shares and warrants | | | 2,388,771 |
| | | 58,706,104 |
[1] Details of the equity raises are as follows:
January 2023 equity raise
In January 2023 the Company issued 23,571,430 shares with 23,571,430 warrants attached. Each share and attached warrant were issued for £0.07, realising gross proceeds of $2.02 million (£1.65 million) and net proceeds after issuance expenses of approximately $1.89 million (£1.54 million).
Each warrant was initially exercisable at £0.15 with a life term of approximately 24 months. The warrants are not transferable, are not traded on an exchange and have an accelerator clause, whereby these warrants may be called by the Company if the closing mid-market share price of the Company exceeded £0.20 over a 5-consecutive day period. If such 5-consecutive day period condition is met, the Company may serve notice on the warrant holders to exercise their relevant warrants within 7 calendar days, failing which, such remaining unexercised warrants shall be cancelled.
As the exercise price of the warrants is denominated in GBP and not in the Company's functional currency, it was determined that the Company's obligation under such warrants cannot be considered as an obligation to issue a fixed number of equity instruments in exchange for a fixed amount of cash. Accordingly, it was determined that such warrants represent a derivative financial liability required to be accounted for at fair value through the profit or loss category. Upon initial recognition the Company allocated the gross proceeds as follows: an amount of approximately $133,000 was allocated as a derivative warrants liability with the remainder of the proceeds amounting to $1.75 million (after deduction of the allocated issuance costs of $0.14 million) being allocated to share capital and share premium. The issuance expenses were allocated in a consistent manner to the above allocation. The expenses related to the warrant component were carried to profit or loss as an immediate expense while the expenses related to the share capital component were netted against the amount carried to equity. In subsequent periods the company measures the derivative financial liability at fair value and the periodic changes in fair value are carried to profit or loss under financing costs or financing income, as applicable. The fair value of the derivative warrant liability is categorized as level 3 of the fair value hierarchy.
The fair value valuation of the warrants was based on the Black-Scholes option pricing model, calculated in two stages. Initially, the fair value of these call warrants issued to investors were calculated, assuming no restrictions applied to such call warrants. As the Company, under certain circumstances, has a right to force the investors to either exercise their warrants or have them cancelled, the second calculation calculates the value of the warrants as call warrants that were issued by the investor to the company. The net fair value results from reducing the call investor warrants fair value from the call warrants fair value, as long as the intrinsic value of the call warrants (share price at the period end less exercise price of the warrants) is not greater than such value. Should the intrinsic value of the warrants be higher than the Black-Scholes two stage method described above, then the intrinsic value of the warrants is considered to be a more accurate measure to use in determining the fair value. The following factors were used in calculating the fair value of the warrants at their issuance:
Risk free rate 4.2%
Volatility 82.3%
In May 2023, the Company changed the terms of the warrants as follows:
Changed: | From | To |
Exercise price of warrants | £ 0.15 | £ 0.060 |
Share price at which accelerator clause may be activated | £ 0.20 | £ 0.075 |
Of the 23,571,430 shares and 23,571,430 warrants subscribed for, the director's participation in this issuance was 3,697,342 shares and 3,697,342 warrants, on the same terms that outside investors participated.
None of these warrants had been exercised by 30 June 2023 and their fair value of approximately $27,000 at such date is disclosed as a warrants liability in the statement of financial position,
Upon this successful equity raise being concluded, the brokers for this transaction received 573,429 two year warrants exercisable at £0.07 per warrant. The fair-value of these warrants at the time of issuance was approximately $23,000. As at 30 June 2023, none of these warrants have been exercised.
May 2023 equity raise
In May 2023 the Company issued 26,116,667 shares at £0.03 per share, realising gross proceeds of $0.98 million (£0.78 million) and net cash proceeds after issuance expenses paid out of $0.92 million (£0.74 million).
Of the 26,116,667 shares subscribed for, the director's participation in this issuance was 916,668 shares, on the same terms that outside investors participated.
The gross proceeds, after deduction of the issuance costs of $54,000, were allocated to share capital and share premium.
Upon this successful equity raise being concluded, the brokers for this transaction received 772,500 two year warrants exercisable at £0.03 per warrant. The fair-value of these warrants at the time of issuance was approximately $14,000. As at 30 June 2023, none of these warrants have been exercised.
[2] Shares issued pursuant to the share subscription agreement
In February 2022, an institutional investor signed a follow-on share subscription agreement with the Company, subscribing for a further $2.0 million, with a total face value of $2,060,000. In March 2022 the full $2.0 million was funded as a prepayment for the subscription shares.
The number of subscription shares to be issued is determined by dividing the face value of the subscription amount by the Settlement Price.
The Settlement Price is equal to the sum of (i) the Reference Price and (ii) the Additional Price.
The Reference Price is the average of the 3 daily volume-weighted average prices ("VWAPs") of Shares selected by the Investor during a 15 trading day period immediately prior to the date of notice of their issue, rounded down to the next one tenth of a penny. The Additional Price is equal to half of the excess of 85% of the average of the daily VWAPs of the Shares during the 3 consecutive trading days immediately prior to the date of notice of their issue over the Reference Price.
The investor converted the following subscription amount during the 6 month period ended 30 June 2023 as follows:
Notice date of conversion | Amount converted - USD | Shares Issued | |
| | | |
21 May 2023 | 230,000 | 6,629,236 |
As described above, the investor converts subscription amounts into shares of the Company at a discounted price. Upon each conversion, the difference between the actual market value of shares issued to the investor and the amount converted, is recorded in finance costs, which in the 6 month period ended 30 June 2023 amounted to approximately $16,000.
NOTE 5 - INVENTORIES
| US dollars | ||
| 30 June | 31 December | |
| 2023 | 2022 | 2022 |
| Unaudited | Audited | |
|
|
|
|
Components and raw materials | 731,039 | 645,852 | 613,218 |
Finished cards | 159,858 | 125,270 | 159,858 |
Total inventories | 890,897 | 771,122 | 773,076 |
NOTE 6 - FINANCING COSTS
| US dollars | ||
| Six months ended 30 June | Year ended 31 December | |
| 2023 | 2022 | 2022 |
| Unaudited | Audited | |
|
|
|
|
Bank fees and interest | 48,170 | 20,321 | 35,150 |
Lease liability financial expenses | 104,742 | 114,244 | 227,246 |
Revaluation of liability related to share subscription agreement measured at FVTPL | - | 60,000 |
230,992 |
Expenses allocated to issuing warrants | 10,096 | - | - |
Expenses allocated to share subscription agreement | - | 80,000 | 80,000 |
Total financing costs | 163,008 | 274,565 | 573,388 |
NOTE 7 - FINANCING INCOME
| US dollars | ||
| Six months ended 30 June | Year ended 31 December | |
| 2023 | 2022 | 2022 |
| Unaudited | Audited | |
| |
|
|
Revaluation of proceeds due on account of shares (financial asset measured at FVTPL) | 80,034 | - | - |
Revaluation of warrant derivative liability | 105,329 | 1,209,960 | 1,214,993 |
Interest received | 76 | 1,418 | 1,507 |
Exchange rate differences, net | 137,375 | 38,485 | 51,152 |
Total financing income | 322,814 | 1,249,863 | 1,267,652 |
NOTE 8 - SEGMENT REPORTING
The Company has implemented the principles of IFRS 8, in respect of reporting segmented activities. In terms of IFRS 8, the management has determined that the Company has a single area of business, being the development and delivery of high-end network processing technology.
The Company's revenues are divided into the following geographical areas:
| US dollars | ||
| Six months ended 30 June | Year ended 31 December | |
| 2023 | 2022 | 2022 |
| Unaudited | Audited | |
| | | |
| | | |
Asia | 54,700 | 42,800 | 290,800 |
Europe | 12,390 | - | 131,000 |
Israel | 137,912 | 149,403 | 429,954 |
United States | 1,193,869 | 512,650 | 2,085,670 |
| 1,398,871 | 704,853 | 2,937,424 |
The Company's revenues are divided into the following geographical areas:
| % | ||
| Six months ended 30 June | Year ended 31 December | |
| 2023 | 2022 | 2022 |
| Unaudited | Audited | |
| | | |
Asia | 3.9% | 6.1% | 9.9% |
Europe | 0.9% | - | 4.5% |
Israel | 9.9% | 21.2% | 14.6% |
United States | 85.3% | 72.7% | 71.0% |
| 100.0% | 100.0% | 100.0% |
Revenue from customers in the company's domicile, Israel, as well as its major market, the United States and Asia, have been identified on the basis of the customer's geographical locations.
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