REG - Ethernity Networks - Interim Results
20/09/2023 07:00
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RNS Number : 9804M Ethernity Networks Ltd 20 September 2023
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:
Ethernity Networks Ltd Tel: +972 3 748 9846
David Levi, Chief Executive Officer
Allenby Capital Limited (Nominated Adviser and Joint Broker) Tel: +44 (0)20 3328 5656
James Reeve / Piers Shimwell (Corporate Finance)
Amrit Nahal/ Stefano Aquilino (Sales and Corporate Broking)
Peterhouse Capital Limited (Joint Broker) Tel: +44 (0)20 7562 0930
Lucy Williams/ Duncan Vasey/ Eran Zucker
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:
US Dollar Increase
(Decrease) %
Operating Costs June
For the 6 months ended 31-Dec
30-Jun
2023 2022 2022
Research and Development Costs net of amortisation, Share Based Compensation, 2,727,389 2,689,191 5,475,581 38,198 1%
IFRS adjustments and Vacation accruals
General and Administrative expenses, net of depreciation, Share Based 895,691 901,286 1,799,794 -5,595 -1%
Compensation, IFRS adjustments, Vacation accruals and impairments
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: $704,853)
are influenced by the timing of deliveries which is dependent on the terms of
the various contracts and orders.
The revenue mix will continue to evolve as the Company progresses, however
with the new business model based on licensing of FPGA and ASICs, and projects
involved in delivering systems which are based on the Company's IP, the Board
anticipates that gross margin should improve.
Segment Reporting
The geographic mix is represented by the makeup of the products supplied, and
the main increase in revenues is attributed to sales to the Company's U.S.
based customers.
SEGMENT REPORT geographic analysis
Region Six months ended 30 June 2023 Six months ended 30 June 2022 Year ended
31 December 2022
US$ % 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 For the year ended
31 December
30 June
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 108,252,292 75,367,394 76,013,296
share
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 Year ended
30 June 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 Year ended
30 June 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 - 60,000
FVTPL
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 Year ended
30 June 31 December
2023 2022 2022
Unaudited Audited
Revaluation of proceeds due on account of shares (financial asset measured at 80,034 - -
FVTPL)
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 Year ended
30 June 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 Year ended
30 June 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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