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Chief Executive Officer’s Review

I am pleased to report another good year for BATM as we delivered increased sales and profit in both of our divisions along with strong cash generation. This reflects a great performance in the second half, with revenues 20% higher than H1 2019, and a particularly robust fourth quarter.

We achieved a number of operational milestones in 2019 that significantly advanced the execution on our strategy in areas that we have identified as growth markets. In particular, in Network Function Virtualisation (“NFV”), we completed delivery under our agreement with Arm and in molecular biology diagnostics, we made strong progress in the development of our NATlab solution under Ador – both of which are now positioned for commercialisation.

During the year, we also established good momentum with our Cyber and Eco-Med activities – with both units receiving several high-value contracts and expanding their customer base.

Now to look at each division in more detail.

 


BIO-MEDICAL DIVISION

Revenues for the Distribution unit increased by 4.5% and accounted for 81.3% (2018: 80.7%) of the Bio-Medical division’s revenue in 2019.

In Israel, our Zer Laboratories subsidiary achieved strong growth in sales of pre-natal diagnostic tests. We received regulatory approval for Zer Laboratories to be able to offer further pre-natal genetics screening tests, becoming one of only two private laboratories in Israel able to provide these tests, with sales commencing during the year. During 2019, there was also an increase in the provision of the new genetics screening tests for the Israeli market that we introduced following investment to expand the local laboratory to install the required technology last year. In addition, Pro-Genetics, in which we hold 49% through Zer Laboratories, achieved good growth in the distribution of cancer diagnostics tests.

Following the introduction of Non-Invasive Prenatal Testing (NIPT) diagnostics tests at our genetics laboratory in Eastern Europe last year, we doubled the sales of such tests in 2019 compared with 2018.

The Eco-Med unit accounted for approximately 10.1% of the Bio-Medical division’s revenues in 2019 compared with 8.7% in 2018, which reflects an increase in revenue of 21.1%. The majority of the growth was due to the completion of the installation of our agri-waste treatment solution, which is based on its Integrated Sterilizer and Shredder patented technology (“ISS”), at a bovine slaughterhouse under a previously-won contract.

We also made significant progress in winning new customers for our agri-waste treatment solution, including introducing the product to new geographies. The first international contract, worth approximately $1.5m and with delivery having commenced in 2019, was with a poultry processing facility in the Philippines.

An important customer win was achieved with the award of a $4m contract by a Taiwanese agri-food conglomerate, whose business activities span the agri-food supply chain in Taiwan, mainland China and elsewhere in Asia. The contract, which is expected to be delivered by the end of 2020, is for three units of our agri-waste treatment solution for two separate poultry processing facilities. This solution will be used in the rendering process to allow the safe treatment of poultry remains to generate valuable proteins that can be used for the production of animal nutrition.

Post period, we received our third international contract for our agri-waste treatment solution, which is worth approximately $1.3m and is expected to be delivered in 2020. The customer is a major poultry integrator that produces, processes, markets and distributes high quality fresh and frozen chicken to customers throughout the Middle East, where it is based – representing further geographic expansion of the customer base for this solution – as well as to several countries in Asia.

We were also delighted that, post period, we received a €29m (c. $31m) order from a European government to deliver 1,000 ventilators in the coming months to help with the fight against COVID-19. This ventilator, which is being manufactured by our Celitron subsidiary in Hungary, is a high-performance ventilator for ICU environments. It has already received CE certification with further certifications pending.

The Diagnostics unit represented approximately 8.6% of Bio-Medical division revenues in 2019 (2018: 10.6%). As stated previously, the Diagnostics unit has been undergoing a re-organisation, which is now almost complete, as it transitions from ELISA to focus on molecular biology solutions and products. This has resulted in a temporary reduction in sales, with 2019 being slightly lower than 2018. However, there was a return to growth in sales of the Diagnostics unit in the second half of the year, with H2 2019 revenues increasing over both H1 2019 and H2 2018 based on diagnostic instrument sales, with this momentum expected to continue in 2020. In addition, we continued to invest in our manufacturing facilities in Italy to increase the efficiency of the production process for systems and reagents, which is expected to generate substantial efficiencies in 2020.

During the year, our new highly compact metabolism testing analyser, the Hemo One, performed well with sales in multiple countries across Europe, Asia and South America. We also continued development work to be able to offer further panels and cartridge-based testing for this instrument, which has been based on demand from medical offices as well as major clients.

Sales increased of our molecular biology diagnostics Adaltis product line that was launched at the end of 2018, including commencing selling in Mexico in addition to Europe. We also extended the range of reagents and entered into new collaboration agreements with significant distributors in the molecular biology field in Italy and Mexico, which translated to initial sales in H2 2019 and is expected to ramp up from 2020.

Post period, we successfully developed a new diagnostics kit to detect the COVID-19 virus. This kit, which is part of the MOLgen molecular diagnostics line that was launched at the end of 2018, has undergone testing by several central laboratories and hospitals that have now verified its ability to diagnose COVID-19. The MOLgen COVID-19 kit is designed to be used with our diagnostic instruments, which offers benefits of speed and accuracy, but it can also be used with some competing diagnostic instruments. Initial production of the kit has commenced at our Adaltis facility, and we are working with academic and research institutions, mainly in Europe, to progress the kit to make it at a price point suitable for large-scale production. The kit, which supports all the Centers for Disease Control and Prevention recommendations, has already received interest from customers in several countries.

During the year, strong progress was made in advancing the NATlab molecular biology solution that is being developed through Ador, which has undergone extensive lab testing and partnerships have been established with several leading research institutions. NATlab provides rapid sample-to-answer diagnosis of bacterial, viral or fungal infections, within approximately 15-90 minutes, using DNA sampling. The unique system is modular, compact and mobile, and is designed to be used at the point-of-care as well as in hospital labs. We believe that NATlab – which has been awarded over 40 global patents, including in Europe and the US, with more pending – will allow medical practitioners to provide far quicker and more efficient treatment.

An important milestone was the signing of a conditional agreement for an investment of up to $30m, and Ador received the initial instalment of $14.5m, to provide additional funds for the commercialisation of NATlab. The second instalment of $15.5m is expected to be funded by the end of 2020, subject to certain milestones being achieved and we have made material progress towards meeting those milestones.

Post period, Ador received its first commercial order for NATlab, which was from the leading Italian distributor of molecular biology and genomics products. Under the agreement, Ador will deliver the new NATlab reader and cartridges for the identification of meningitis in the second half of 2020.

In addition, COVID-19 will be included within the Ador suite of testing kits as part of its travel panels. Laboratory bench tests are expected to commence imminently.


NETWORKING & CYBER DIVISION

Delivery was completed on our joint development agreement with Arm to develop our NFVTime operating system to enable an ecosystem of Virtual Network Function ("VNF") services optimised to run on Arm’s architecture. NFVTime enables a significant increase in throughput compared with competing solutions. We have been working with Arm to conduct joint marketing of the solution that enables carriers to deploy their own virtualised networks, which can also be a key element in
allowing operators to leverage the benefits offered by 5G.

Together with Arm, we entered into a proof-of-concept for the joint NFV solution with a Tier 1 network operator in 2019, which is expected to progress to field trials this year. Negotiations are also underway with several other network operators in the US and Europe to undertake proof-of-concept. We commenced receiving initial revenue from NFVTime sales during the year, which we expect to ramp as the projects with network operators progress.

Key Arm-optimised VNF services that we added to the ecosystem, through integration with our NFVTime uCPE solution, include Clavister’s virtualised cyber security platform and Fortinet’s VMware SD-WAN solution.

A key milestone under the agreement with Arm was our development of a new technology under our long-standing partnership with NXP that enables a significant increase in network traffic, without requiring an increase in computing power. The new technology applies when licensing NFVTime on NXP’s Layerscape® L S2088A and L S1088A m ulticore processors, which are built on Arm core technology. The solution will enable more efficient and cost-effective customer premise networking, and support next-generation 5G/MEC use cases.

The growth in revenue from ICT solutions and services was based on increased sales with both existing and new customers.

We advanced our 5G strategy with the launch of a new ultrahigh capacity networking platform for network edge. The T-Metro 8104, which is NFV ready, is the industry's first CE2.0 compliant service aggregation and cloud gateway platform available at 1.2Tb capacity and it is designed to allow network operators to leverage the transformation enabled by hyper-cloud connectivity, 5G and MEC. It has a modular design that, along with having a small form factor and the ability to be installed outside a telecom cabinet, allows customers to expand and add capacity and interfaces as required.

Also during the year, we introduced the T-Marc R3305 series, with sales commencing in the fourth quarter. The routers and integrated access devices support a variety of enterprise-grade features that can form the foundation of a business’ entire network. This new product represents an expansion of our offering into routing as part of its strategy to target the enterprise market.

Our cyber security business made excellent progress, with a strong increase in revenue from previously awarded contracts and receiving new orders totalling $9.1m during the year, of which $6.5m was delivered in H2 2019.

We were awarded two further contracts, worth an aggregate of $6.5m, from the government defence department customer that we have been supplying with cyber security products and services since 2017. Post period, we received a $4m follow-on order, which is expected to be delivered in the second half of 2020, from this customer for the delivery of additional hardware and software cyber security products as the solution is rolled out to encompass further employees. Following this latest order, the total contracted revenue awarded to BATM to date by this customer for this cyber solution is over $18m.

We were also awarded an initial $2m contract by a branch of a national armed forces – a new customer – for the provision of a combined cyber security and networking solution. This is our first contract for this combined solution.

In addition, we expanded our cyber security offering by enhancing our T-Sense cyber product, which is a software-based smart network sensor that is able to discover and classify network devices, applications, services and activities over the network, so that it is compatible with Arm architecture as well as Intel-based platforms. As a result, T-Sense is now able to leverage the advantages of all major infrastructures, which expands its addressable market. This enhanced product is expected to be available to customers this year.


COVID-19 Update

At the end of December 2019, we were alerted to the possibility of a pandemic outbreak by monitoring information mainly from China. The effectiveness of our response has been enabled by the significant investments we have made in advancing our Bio-Medical division in recent years and our immediate preparation of all parts of the division for an outbreak. Our Bio- Medical division is now able to quickly provide solutions that include diagnostic kits for any new pathogen that appears and devices like diagnostic instruments, ventilators, pathogenic waste disposal and more.

With the experience gained in the company and our relationships with leading academic institutions, when we received the worrying information about a possible outbreak, we were able to launch a new precise and fast molecular diagnostics kit to detect COVID-19. Clinical verification and evaluation was undertaken during February 2020 by leading universities and hospitals, and we received certification in March 2020. Since then, production and sales have been ramping up. We are also in the process of developing various other detection kits, among them kits for home testing, in partnership with Nova-med, which we expect to complete within the next few months. Finally, we were honoured to receive our first order of c. $31m from a European government to provide 1,000 ventilators by the end of Q3 2020 to support their response to COVID-19.

Our primary facilities in the Bio-Medical division, in Israel, Italy and Hungary, have remained operational throughout this period. They are able to produce at a substantial capacity despite the measures taken to ensure the health and safety of our employees in those locations as well as several regulatory limitations and other impacts of lock-down.

In our Networking & Cyber division, our facilities have remained open in both Israel and the US subject to public health controls. During Q1 2020, the effect of the outbreak was minimal. As a result of COVID-19, some customers are temporarily postponing certain projects and we are currently unable to perform some activities due to the restrictions on travelling to a customers’ premise or a supplier. Consequently, it is prudent to anticipate some lost revenue in this division, however it is too early in the current financial year to determine if this will have any material impact on the Networking & Cyber division.

As a result of the above, we expect the Bio-Medical division to perform well and the Networking & Cyber division to experience a temporary slowdown. Given the uncertainty surrounding the length and economic severity of the crisis, it is too early to estimate the financial impact on BATM.

We continue to work hard to ensure our employees are fully supported in remaining safe, well and able to work. Today, BATM is well positioned in large markets showing long-term growth potential and with a set of technologies, services and solutions to meet its customers' evolving needs. As a result, the Board believes that, with the actions taken to date in response to the pandemic along with the further work to be undertaken to achieve the Group's strategic objectives in 2020, BATM will continue to deliver shareholder value.


Dr. Zvi Marom
Chief Executive Officer
30 April 2020