Ethernity : Annual Report for the Year Ended 31 December 2018

Ethernity Networks Ltd

(Ethernity or the "Company")

Company registration number: 51-347834-7.

Results for the Year Ended 31 December 2018

Ethernity Networks, headquartered in Israel, provides innovative networking and security solutions on programmable hardware for accelerating telco/cloud networks. Ported onto any FPGA, Ethernity's software offers complete data plane processing with a rich set of networking features, robust security, and a wide range of virtual functions to optimise the network. The Company's ACE-NIC smart network adapters, ENET SoCs, and turnkey network appliances offer best-in-classall-programmable platforms for the telecom, cloud service provider, and enterprise markets offering its customers complete solutions that quickly adapt to their changing needs, improving time-to-market and facilitating the deployment of edge computing, 5G, IoT, and NFV.

The Company's core technology, which is populated on programmable logic, enables delivering data offload functionality at the pace of software development, improves performance and reduces power consumption and latency, therefore facilitating the deployment of virtualization of networking functionality.

David Levi, Chief Executive said "I am now significantly more positive of achieving our planned growth objectives in existing and new market places as I see the growth in interest in the Company's offerings and the opening of materially significant discussions that will lead to the Company making considered headway in 2019 and allow for multiple times growth in 2020 as the solutions pass testing phases by the operators and reach mass deployment."

For further information, please contact:

Ethernity Networks

Tel: [phone]

David Levi, Chief Executive Officer

Mark Reichenberg, Chief Financial Officer

Arden Partners plc (NOMAD and Broker)

Tel: [phone]

Tom Price / Benjamin Cryer

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.

Chairman's Statement

During 2018 Ethernity continued to develop its patented products and technology solutions across a range of applications and related markets in the network and cloud data management arenas.

Specific product and design solutions were delivered during the year resulting in first technology licensing agreements with two Tier1 OEM customers, that will generate recurrent revenue streams due to commence in 2019 and then in following years.

Following on from the previous year, legacy royalty and FPGA income remained low as anticipated during the year due to historic customers not producing revenue from this generation of products. However, going forward licensing income is anticipated to recover in 2019 and this is set out in further detail in the Chief Executive`s Review below.

During the year the management's focus continued on developing the Sales and Marketing and Research and Development team's strength and infrastructure, as the Company deployed resources to support existing customers and to target new business opportunities.

The Company traded in line with expectations for the year with revenue delivery in 2018 being relatively low due to market delays and customer positioning. This is outlined further in the Strategic and Financial Review set out below.

Revenues for 2018 were $1.12m (2017 $1.52m) with gross margin of $0.813m (2017 $1.3m) and operating loss of $2.7m (2017 $0.152m profit) respectively. The Company continued a managed investment programme, investing approximately $4m (2017 $1.95m) in R&D and related expenditure.

At the year end the Company`s cash balance available for working capital and investment for growth was $8.5m (2017 $14.9m). The Company maintains close management of the use of cash resources and the rate of deployment of cash is monitored by management and the Board with a view to adjusting cash utilisation and maintaining cash reserves to meet trading requirements.

Since the year end, Ethernity has continued with its investment programme which is focussed on customer led product and service development directly related to customer relationships. Sales and market opportunities are developed based on a continued presence and profile within the network and data management sectors, where the Company`s IP and technology innovation maintains a considerable profile.

The Board remains conscious of the uncertainties over the timing of the securing of customer orders and receipt of revenues from product sales and licensing transactions. This remains a challenge for the executive management in predicting when substantive revenues and related profits will be earned, including for the current financial year. However, the Board is confident that the Company`s solutions continue to be well received and will translate to significant revenues in the years ahead.

The Board is very appreciative of the considerable efforts of our management and staff, who all work tirelessly towards the development, sales and administrative goals of the Company. I thank them for their continuing hard work and commitment to the Company.

Outlook

It is apparent that 2019 will be another year of challenges to steadily develop customer partnerships and relationships and grow the revenue delivery from a relatively low base. However, the Board is confident that progress will be made during the year and of building value over the longer term for shareholders.

Graham Woolfman

Chairman

11 June 2019

Chief Executives Statement

Business and Market Overview

Ethernity Networks operates in a market which is evolving and undergoing significant change. This includes the growing use of FPGA devices for networking appliances and the transition to 5G networks which will provide higher data throughput to users and Network Function Virtualization (NFV).

The Company presents its technology and appliances to OEMs and other partners responsible for integration, delivery and support of overall solutions with embedded Ethernity technology, in FPGA Smart NIC or appliances. The Company has continued to build its R&D and Sales and Marketing infrastructure to enable the Company to move from a technology / IP company to a solutions and complete product provider.

Central to all of Ethernity`s delivery is patented architecture which produces the fundamental ENET code, which has been deployed in 600,000 OEM platforms in broadband, Ethernet Access and mobile markets. This ENET code is embedded into the various solutions, be they licensed products, the FPGA Smart NIC or as part of appliances.

We expect continued progress in the market acceptance of the use of FPGA for networking and security applications in preference to ASIC's. This is evidenced by the initiatives undertaken on the OCP (Open Compute Project) and AT&T. Furthermore, many ASIC Network processors' offerings have been discontinued1, providing many more opportunities for FPGA-based all programmable and cost effective platforms. We are confident that our technology will be a successor to ASIC based NPUs for networking and security appliances.

With our main goal to deliver complete product solutions that will result in generating a targeted 10 times more revenue from each use of our ENET Code technology, we developed the ACENIC FPGA SmartNIC family to target acceleration of Networking Function Virtualization at the telco edge, which is still an evolving market, along with an additional networking appliance for existing markets - including FTTH and Ethernet Access as described below

These two markets are:

• The FTTH (fibre to the home) Broadband deployment with XGSPON, DPU/ONU. We are currently discussing a 10G Passive Optical Network (XGSPON) solution on a central office site. According to Dell'Oro Group, PON has a Total Addressable Market of $7 billion by 2022 and a CAGR of almost 40%.
• The EAD (Ethernet Active Devices) market is a further opportunity for the Company currently under discussion, the product offering being a UEP (Universal Edge Platform) as published on the Company website and in the market place on 29 May 2019.2 Currently we are in discussions for the mass rollout of the UEP with a major US OEM. The existing marketplace for this offering is forecast to reach $1.47 billion in 2021, achieving a 2017-2022 compound annual growth rate (CAGR) of 8 percent.

We have addressed the existing appliance market under Current Trading below .

Review of 2018 achievements

I am pleased to report that during the 2nd half of 2018 we succeeded in winning existing Flow Processor FPGA Firmware and Software business with a Tier1 U.S OEM, and signed a contract with a military-avionic Tier1 OEM for a high capacity switch, all integrated on Xilinx's FPGAs Commercial Off The Shelf (COTS) devices, with the majority of the revenue from the two licensing deals being recognised during 2019. Furthermore we delivered the Company's ACENIC- 100 FPGA Smart NIC, supporting complete router functionality, to a Korean OEM for a Multi access Edge Computing (MEC) platform to be hosted on low cost, low power HPE servers designed to meet the edge compute constraints. The most important licensing revenues come from ongoing recurrent royalties and FPGA that the Company will continue to generate from contracts and wins signed more than 10 years ago. However, the recurrent revenues were badly affected during 2017 and 2018 due to difficulties experienced by three long-standing customers in generating sales from products developed years ago. Whilst in 2019 the revenue from two of the three vendors has recovered and is growing, one of them has ceased operations. In light of this the licensing deals signed with the Tier1 OEMs represents part of the change we anticipate developing into stable recurrent revenue from royalties. Going forward the company intends to focus on Tier1/Tier2 OEMs rather than the small Tier3/4 vendors we dealt with in the past, with the goal being to build stable recurrent revenues from technology licensing.

In conjunction with our long term plan and active projects with major OEMs relating to acceleration of virtualized networking applications for obtaining major market share from FPGA smart NICs for telco cloud business, in which the

market is still evolving, our plan is to generate greater value from our existing technology and solutions, by offering complete all programmable networking and security platforms that we target will generate 10 times more revenue for each use of our firmware and software technology. This has been enabled by the following:

• We developed and obtained application software that can run on top of Ethernity's Flow Processor FPGA Firmware;
• We have developed a hardware platform to serve as a Universal Edge Platform (UEP) that will host our field proven flow processor for general edge access deployment with a complete programmable platform; and
• We developed XGSPON technology to serve deployment of fiber to the distribution point (FTdP) , cellular site aggregation and FTTH (Fiber to The Home).

These developments will fuel major revenue streams by delivering complete solutions while the telco cloud business is evolving.

Our ACENIC-100 FPGA SmartNIC offers unique capabilities for telco/cloud edge market by integrating complete router functionality on a NIC to serve as a gateway for multiple virtualized networking appliances such as Security, VPN, Broadband gateway and Internet of things (IoT) aggregation platforms. With the current ongoing discussions and engagements with new potential Tier1 customers, we are extremely positive as to the progress the Company is making to become the leader in delivering networking and security acceleration for various edge virtualized appliances.

Current Trading

Revenue in the year under review was bolstered mainly due to the two new contracts signed in the fourth quarter of 2018 referred to above along with the resultant increase from the recurrent revenue derived from previous ENET flow processor engagement and the licensing deal. The Company is making positive and solid progress towards obtaining major business for its new Universal Edge Platform proposals. With the Release of our FPGA Smart NIC ACENIC-100, we anticipate a greater impact on, and engagement in joint development projects with Tier1 OEMs around the ACENIC- 100, that will further fuel our growth in this area.

Furthermore, the Company anticipates concluding agreements with two Tier1 OEMs in the FTTH Broadband deployment and EAD (Ethernet Access Devices) existing markets respectively, with rollout and production plans for the latter portion of 2019, and mass deployment in 2020, along with other initiatives including in 5G networks. This will drive the product into the market along with our FPGA SmartNIC solutions.

The year continued with the bedding down of the infrastructures for R&D and Sales and Marketing as detailed in our IPO plans and the 2018 half year results, with our year to date performance continuing to track the half year as anticipated. We believe that both the Research and Development and Marketing infrastructures are now positioned as we anticipated so as to allow the projected growth.

As anticipated, the building of these teams had a direct effect on our profitability for the 2018 financial year, in support of management's philosophy to build the Company in 2018 so as to achieve future growth in line with the anticipated market growth from 2019 onwards. While we are mindful of the risks posed by the prevailing dynamics and current delays in the macro market, we continue to have a high level of confidence that we are the best positioned company in our market, as evidenced by the new contracts signed and the current discussions with new and existing customers.

Outlook

The Company continues to focus on the development and delivery of its SmartNIC solutions for joint development projects with Tier1 virtualization solutions, that when completed will fuel growth from 2020 onwards. In parallel with this, the Company continues to drive business in existing markets including mobile, broadband, cable and wireless, together with vertical markets such as the avionics and automotive markets, with the goal of generating additional revenues.

Revenues increased in the second half of 2018 over the same period in 2017 due to an increase in activities around licensing deals signed with Tier1 OEMs. This trend has continued into the first quarter of 2019, with revenues materially surpassing the same period of 2018.

In 2020 the Company anticipates commencing the generation of cash flow from trading operations during the second half of the year.

I am now significantly more positive of achieving our planned growth objectives in existing and new market places as I see the growth in interest in the Company's offerings and the opening of materially significant discussions that will lead to the Company making considered headway in 2019 and allow for multiple times growth in 2020 as the solutions pass testing phases by the operators and reach mass deployment.

David Levi

Chief Executive Officer

11 June 2019