Ethernity : Semi-Annual Report

10 September 2020

ETHERNITY NETWORKS LTD

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

Interim results for the six months ended 30 June 2020

Ethernity Networks Ltd (AIM: ENET.L), announces its interim results for the six months ended 30 June 2020.

Ethernity Networks Ltd. (AIM: ENET) provides innovative, comprehensive networking and security solutions on programmable hardware for accelerating telco/cloud networks performance. Ethernity's FPGA logic offers complete Carrier Grade 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 optimize telecommunications networks. Ethernity's complete solutions quickly adapt to customers' changing needs, improving time-to-market and facilitating the deployment of 5G and edge computing.

Financial summary:

• Revenues decrease to $359,375 over the comparable period (H1 2019: $971,709)
• Gross margin decreased to $316,982 over the comparable period (H1 2019: $843,002)
• Gross margin percentage consistent at 88.20% (H1 2019: 86.75%)
• Research and Development, General and Administrative, and Marketing expenses reduced by 24% over previous period
• EBITDA loss (adjusted for R&D capitalisation normalisation) reduced by 12% to $2,497,517 (H1 2019: comparable
  adjusted loss: $2,823,652)
• Comprehensive net loss (adjusted for R&D capitalisation normalisation) decreased by 13% over the comparable period
• Cash and cash deposits balances at 30 June 2020 of $0.55m (31 December 2019: $2.66m) (30 June 2019: $5.9m). o Net cash usage rate during H1 2020 ($2.69m) reduced by 27% compared to H2 2019 ( $3.24m )
  o Additional cut in expenses implemented for H2 2020 have further reduced our cash consumption. Subject to contract wins, R&D expenditure may be increased in the latter part of 2020.
  o Cash resources bolstered following successful placing in July 2020 raising £880,000 (approximately $1.1m) before expenses

Operational highlights:

Following on from the FiberHome 5G User Plane Functionality (UPF) collaboration started at the end of 2019, H1 2020 continued the momentum around the 5G UPF offering to other potential customers.

• In February 2020 we finalised an agreement with TietoEVRY to create a joint offering of an open source concept based on VPP for 5G UPF to accelerate 5G packet processing at the network edge. The intention is to deliver to customers an end-to-end open UPF platform that includes the UPF control utilising the VPP open source and the UPF data plane running and offloaded by the ACE-NIC100. Following completion of the enablement with the VPP we have delivered the offering for lab testing to two operators and to two strategic partners. Furthermore, major go-to-market activities are managed jointly with TietoEVRY in China, with a global go to market collaboration planned for 2021.
• In March 2020 we achieved a further design win with another Chinese OEM that is working on integrating their UPF control software running over DPDK to operate on top of our ACE-NIC for UPF data plane offload with delivery of the complete offering for service provider testing planned during Q4 2020.

• In April 2020 we shipped a number of ACE-NIC100 cards to a large Chinese operator following an order received for product introduction and integration, and further progress will be managed through our OEM customers.
• We have commenced a process with two strategic world technology industry leaders to support the introduction and dissemination in the open compute(r) industry of our 5G UPF offload.
• In early June 2020 we received a further order directly from another Asian service provider planning to deliver their own UPF control and offload, with Ethernity's ACE-NIC, the UPF data plane. Assuming the deployment plan is successful, commencing in the second half of 2021, this may lead to 500-1000ACE-NIC card sales in the two years following starting of deployment.

The Company now has a direct relationship with three major telecom service providers in China - China Mobile, China Telecom and China Unicom - all either planning to use an FPGA SmartNIC offering for 5G UPF, or already under development in their laboratories for integrating their own open UPF software to be offloaded by the ACE-NIC. Further business and revenue from the Chinese operators will flow through our OEM customers.

Further to the above, the Company has continued to achieve recognition with the following other notable events:

• The Company was named as a Vendor to Watch in a February 2020 Gartner research report titled Market Trends: Function Accelerator Cards Disrupting Traditional Ethernet Adapter Market.
• On 30 April 2020, the Company announced a design contract with a North American Tier-1 OEM for Ethernity flow processor technology, including ENET Switch and Traffic Manager firmware, to support 200Gbps performance on customer's xPON Optical Line Termination device.
• On 22 June 2020, the Company announced that it signed a contract with Hong Kong Techtronics Electronic Technology Limited to manage distribution of its 100Gbps ACE-NIC100 FPGA SmartNIC throughout the Chinese market.

Post-period events

• On 14 July 2020 the Company completed a successful placing of new shares and warrants, including participation by Directors, to raise funds of approximately $1,110,000 (before expenses). The net proceeds were used to strengthen the balance sheet, to allow the Company to support the growing number of engagements for its 5G offering towards successful field deployments, and for general working capital purposes. This placing included the issue of c. 3.7 million warrants at 20p and c. 3.7 million warrants at 30p to participating shareholders for a 12 month period.
• On 5 August 2020, the Company announced that it had signed a new contract with an existing OEM customer, based in St Petersburg, to upgrade an existing hardware platform with new FPGA-firmware to serve the enterprise router business.
• Share based compensation and Directors options
  Due to the Directors' cuts in remuneration, as previously announced, along with the substantial additional time requirements of the non-IsraelNon-Executive Directors, the Company intends to issue certain shares and options, details of which will be announced in due course.

The Company continues to focus in the short term on entering into licensing deals as was completed with the St. Petersburg based customer. The upfront cash benefits generated by the licensing deals contributes to the Company`s financial resources to meet the anticipated 5G deployment that is anticipated to commence in 2021.

We are experiencing a continued positive reception to the Company's product offerings with Tier1 OEM's and anticipate that more design wins will be achieved in the next 6 months.

Over the last two months the Company has had ongoing positive progress with our 5G ACE-NIC100 OEM customers for UPF offload toward completion of a solution that can be delivered to the market by our OEM customers, and further completed a 400Gbps fabric switch design that can cascade two ACE-NIC100s to support 200G UPF offload. In addition the Company is engaged in discussions on the existing Company's Router-on-a-NIC for vRouter Offload on 5G Distribution Units as part of the Cloud Radio Access Network which may lead to additional market share for Ethernity in the upcoming 5G network. 5G mobile networks are expected to start deployment during 2021 and are based on virtualised environments. With the increased throughput of the 5G mobile network, acceleration of the UPF data plane at the edge of the network has become a core requirement compared to existing 4G mobile networks.

The Company anticipates continuing to conclude licensing agreements before the end of the year within the markets in which it operates, with both existing and new customers.

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

"The first half results were not in-line with our initial expectations at the beginning of the year, as some licensing deals were delayed beyond our expectations, as well as the impact of COVID-19, albeit first half revenue expectations were much lower than that estimated for the second half of 2020. However, we have experienced that our customers have now returned to certain levels of normal business operations and are finalising their thought process relating to development of new products and architecture that is expected to lead to demand of our ENET Flow Processor. The deals forecast for this year are intact and we hope that these will be concluded during H2 2020 or Q1 2021 at the latest. Our core focus remains on the Company moving from an IP/technology provider to a solutions provider for virtual networking and security appliances with greater focus on 5G, with licensing contracts targeting the broader market to cover other opportunities that require the use of our technology. This should leverage our OEM's investment in go-to- market and product solution development while utilising our technology to develop into stable recurrent revenue from royalties. The goals of the Company's development activities are to build stable recurrent revenues from technology licensing and the supply of our ACE-NIC FPGA SmartNIC product family.

We remain confident that Ethernity`s technology is well positioned to become one of the key technology solutions providers in its marketplace."

ethernity@theproffice.com

MARKET ABUSE REGULATION

The information communicated in this Announcement is inside information for the purposes of Article 7 of Market Abuse Regulation 596/2014 ("MAR"). For the purposes of MAR and Article 2 of Commission Implementing Regulation (EU) 2016/1055, this announcement is being made on behalf of the Company by Mark Reichenberg, Chief Financial Officer

OPERATIONAL AND FINANCIAL REVIEW

The challenging market trends continued through the first six months of 2020, exacerbated by the worldwide COVID- 19 pandemic, including the discussion and evaluation process with potential customers not being entirely within our control. However, the Company is experiencing positive results from focusing on becoming a solutions provider and from the engagement with customers previously during 2019 with resultant design wins during the first half of 2020 and continuing in 2020 ongoing customer engagement activity continues to increase substantially. There has been significant progress related to the ACE-NIC, and licensing deals, some of which we are hoping to be completed over the remaining months of 2020.

Whilst we had previously commented that the adoption of the new networking virtualisation market in which we operate has been delayed from when originally anticipated, we are now beginning to experience the market entering engagement and deployment stages. We remain confident in the long term prospects of the Company and this is supported by the number of ongoing project collaborations around the Company's ACE-NIC and royalty revenues streams.

During the period under review, the Company delivered revenues of $359,375 (H1 2019: $971,709) and a gross profit of $316,982 (H1 2019 $843,002). Revenues are lower than the comparable period and not unexpected as announced in previous market updates prior to the release of the 2019 annual results,, regardless of which, the first half revenue expectations were initially much lower than that estimated for the second half of 2020, however we still remain confident that the existing and new customer engagements and relationships in the forthcoming 12 months will provide more than $2m in revenues from licensing and royalties.

The revenues reported are directly related to the timing of design wins, licensing deals and contracts anticipated for the year, with the management growth expectations being aligned for the second half of the 2020 year. As previously announced, revenues in the second half of 2020 will be bolstered from the following:

• On 30 April 2020, the Company announced a design contract with North American Tier-1 OEM for Ethernity flow processor technology, including ENET Switch and Traffic Manager firmware, to support 200Gbps performance on customer's xPON optical light termination device with a total revenue of $740k for the following 12 months period
• On 5 August 2020, the Company announced that it signed a new contract with an existing OEM customer, based in St Petersburg, to upgrade an existing hardware platform with new FPGA-firmware, with a total of $190k for a 12 months period and, pending successful execution, anticipated FPGA revenues of c. $1m during 2021.

The gross profit percentage of 88.2% (H1 2019: 86.8%) remains consistent with the year ended 31 December 2019 and the comparable period in 2019 due to the different product mix within the revenue, where design wins and royalty revenue, which are near 100% gross margin, contributed 85.2% of revenue in H1 2020 compared to 76.9% in H1 2019.