Ethernity Networks (LON: ENET) shares are down 76% over the past 5 days. Sure, we could say there’s a war on (not that there quite is but we could say it) and that’s what’s causing the problems. But this isn’t, in fact, quite so. Clearly, events in Israel do not help matters. But the economy still works, the courts, the banks and so on. The problems are more deep seated than what’s been happening this past couple of weeks. Effectively, no one seems to want to pay Ethernity. Or, not enough with to do so. Therefore there’s something of a gaping hole where the revenue receipts should be. And so an application for what is the Israeli equivalent of a Chapter 11 filing.
The announcement: “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.” That is, effectively, Chapter 11.
OK, well, but it’s not the most recent events causing that. It’s actually rather more a comedy of errors.
Ethernity Networks share price from Google Finance
There’s been a short suspension and so on. But the real errors are here: “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.” Well, that’s partly bad luck but where was the credit department? Making sure that payment would arrive from a shaky customer? “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.” Err, yes, where was the credit department? “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.” Producing stuff that doesn’t get paid for, well, yes, that’ll cause problems. But where was the credit department?
This last also seems a bit hopeful: “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.” Folk who haven’t paid us for years really will now we really need the money. Not wholly convincing.
Let us say that we are not confident about this Chapter 11 process.
