Application for TSP and suspension from trading
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.
12 October 2023
ETHERNITY NETWORKS LTD
("Ethernity" or the "Company" or the "Group")
Application for Temporary Suspension of Proceedings in Israel
Suspension of trading on AIM
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 that it has applied to court in Tel Aviv for a Temporary Suspension of Proceedings ("TSP") order (the "TSP Order") and the convening of a meeting of creditors in accordance with amendment number 4 to the Israeli Insolvency and Economic Rehabilitation Law. The Company also announces the temporary suspension of the Company's ordinary shares from trading on AIM.
Background Information and current trading
As previously announced, the Company has faced significant challenges in recent months and has implemented a new business strategy, alongside a significant cost cutting exercise, in order to address these conditions. These challenges have included a significant and unexpected increase in cost and lead-times of the components on which the Company's technology is embedded, following the global components shortage as a result of the global pandemic. This resulted in an increased financial strain on the Company. Several of the Company's substantial customers have experienced financial difficulties themselves due to the global pandemic and subsequent challenges in the capital markets. This has resulted in the Company having difficulties in collecting customers' outstanding debts.
On 1 September 2023, the Company announced that it had received notice of cancellation of one such contract (first announced on 30 July 2021). This contract was with an Israeli company, Siklu LTD ("Siklu"). Siklu entered into financial distress following the cancellation of its IPO on the Tel Aviv Stock Market and as a result terminated the contract with Ethernity. The contract cancellation took place after the Company had issued large orders for components to fulfil the contract and after the Company assigned more resource to fix the design failures of Siklu. This has resulted in the Company holding an excess stock of components which have not been used.
On 18 October 2021 and 20 September 2022, the Company announced signed contracts for $3 million and a follow-on contract for $4.6 million respectively with its Chinese customer, that operates in China and India. The Company claims that the Chinese customer has breached the two signed contacts as the customer has not collected the orders which were fulfilled by the Company for XGS-PON and GPON. In addition, the Company is not in receipt of the contracted advance payment due in accordance with the terms of the $4.6 million contract. This has resulted in a debtor balance with this customer of c. $1.1 million, which remains unpaid. The Company continues to support the Chinese customer to seek a resolution.
In addition, the Company believes that two of its long-term customers have been violating the usage of a license from the Company for several years and will be taking steps to claim against this infringement.
Lastly, the Company had anticipated receiving a significant cash payment from a customer during the course of the last two weeks, however this has not yet materialized. The customer was due to visit the Company this week, but this has been postponed due the current emergency situation in Israel.
These events have materially adversely impacted the Company's trading and prospects and resulted in the Company's current cash-flow difficulties, and therefore the Board has taken the decision to submit the TSP Order today. The Company's current cash balance is c. $107,000.
Application for TSP order
The Company has applied to the court in Tel Aviv for a TSP Order that will provide it with 90 days to resolve outstanding issues with creditors and implement a new business plan. To date, there are no formal proceedings against the Company, and this is a preventive measure to give the Company time to resolve issues with creditors and seek remedies under Israel's Insolvency and Economic Rehabilitation law.
During the 90 day TSP period, the Company has drawn up a temporary operating plan, based on ongoing cash collection from customers and putting in place interim financing up to a total of 1,000,000 NIS to be used as 'insolvency proceedings expenses', which would allow the Company to continue operating as a going concern during the period to provide time to formulate and seek approval of a debt arrangement that would bring about optimal utilization of the Company's assets (tangible and intangible) in favour of an intelligent repayment of its debts to its creditors. Further details on the interim financing will be provided once finalised. The Company will also seek the court's assistance in the recovery of debts and to come to an arrangement with customers that the Company believes have infringed Intellectual Property licenses with the Company.
During this process, the Company will continue to support its paying customers and seek to sign licensing deals with new customers for its Packet Processing technology, PON technology and system solutions.
Further details on the interim financing will be announced once it has been finalised.
Pursuant to the application, the Company has asked the court the following:
· to issue a temporary suspension of proceedings for 90 days, according to which no legal proceedings will be taken and/or continued, including execution procedures and other collection procedures, against the Company;
· to appoint a settlement manager for the Company, whose powers will be to convey arrangements with the creditors;
· to authorize the Company to publish notices in the press regarding the submission of this request, and in addition to order that in accordance with the insolvency regulations and the temporary order regarding the issuance of an order delaying the proceedings will be published by the commissioner;
· to authorize the Company to publish advertisements in the press in accordance with the regulations, regarding the submission of debt claims by the creditors, and this within 21 days from the date of the decision on this request;
· to authorize the Company to hold creditor meetings, to be conducted by the settlement manager, for the purpose of approving the debt settlement proposal by the Company (as formulated), as well as to publish appropriate ads in the press and make inventions in accordance with the regulations; and
· to give any other instruction, as the honorable court deems appropriate to order it.
Should the TSP be approved by the court, the Board of Ethernity is optimistic that there is a reasonable chance that the proposed settlement will be approved by the creditors (especially considering the implications of the alternative scenarios, which could include a liquidation of the Company) within the period.
The timing for approval of the TSP Order by the court is uncertain in part due to the ongoing emergency situation in Israel. A further announcement will be made once a decision has been made by the court on the application. There can be no guarantee that the court will approve the application. In the event that the application is not approved, the Company would need to seek alternate measures to secure the future of the business.
Recovery Business Plan
The Company's proposed debt settlement with creditors is based on the ability of the Company to continue its trading activities as a going concern (under the framework of the TSP), in a way that would allow it to recover and generate profits through: (i) continued sales to existing, paying customers; (ii) sales of new user licenses and products it has developed; and (iii) further reducing the cost of sales in accordance with the new business model in which it is has been operating for the past few months.
Furthermore, the Company will seek to resolve disputes it has with two of its long-term customers in relation to alleged infringements of the user license by the customer. Should the Company reach a satisfactory outcome with these customers, it would be expected to generate enough cash to allow the Company to continue its growth plan per the new business model.
Further details on the recovery business plan will be announced once it has been finalised.
The Board of Ethernity shall remain in place during the process and continue to have operational control of the Company, to oversee and implement the temporary operating Plan and develop a recovery business plan.
A copy of the TSP Order, in Hebrew, will be published on the Court's website and an English translation of the TSP Order will be made available on the Company's website, https://ethernitynet.com/investors/.
Suspension of trading on AIM
In light of the uncertainty over whether the TSP Order will be approved, the Board of Ethernity has requested an immediate suspension to the trading on AIM of its shares pending clarification of its financial position and trading in the Company's shares will be suspended at 12:00 p.m. today.
The Company's shares will remain suspended pending confirmation whether the application has been approved by the court. Further updates will be provided by the Company once a decision has been made.
David Levi, CEO, said "It is highly regrettable that we have had to take this course of action to protect the Company. However, if granted, this will allow the Company time to resolve issues with creditors and complete the restructuring of the business and implementation of our revised business model that focus on short-term cash generation. If we are unsuccessful, this will preserve the most value for shareholders and allow us to seek a buyer or other solution for the business. During this period, the Board and I remain fully committed to the business and finding a solution for Ethernity to continue as a going concern and thrive as a technology business."
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