Sonovia Ltd.

Investor Presentation • Jun 13, 2021

INDEPENDENT EQUITY RESEARCH

SONOVIA – Update Report

June 13, 2021

Significant milestone achieved towards the commercialization of the company's technology and transition to sales; price target remains unchanged

Sonovia develops ultrasonic technology that performs value-added treatments for textiles, endowing them with unique properties such as anti-pathogenic, water repellency, flame retardancy, and more.

Strategy and market - Sonovia's ultrasonic technology aims to disrupt the textile wet-finishing industry – the 2nd most polluting industry globally – by integrating with existing textile finishing lines and proprietary chemical formulations. Sonovia operates within a \$15.8 billion market for functional textile finishing agents and textile dyeing.

Sonovia exclusively holds the global commercialization rights for two patents on the use of sound waves to impart anti-pathogenic properties through metallic compounds and has also filed a temporary patent application for its development in the field of water repellency; The company is in a strategic partnership with Brückner Trockentechnik GmbH & Co. - A German textile machine manufacturer with international operations, and performs several pilots with leading international brands and manufacturers; The company recently entered into a strategic agreement with Delta-Galil to assimilate an industrial machine at Delta's Innovation Center at Karmiel and to promote the technology sales to Delta's leading customers.

Sonovia develops a novel technological platform, envisioned to become the future incumbent technology for performing textile wet-finishing applications, in a versatile, cost-competitive and sustainable process. However, it remains to be seen whether Sonovia succeeds in ramping up its sales.

Valuation - We value Sonovia's equity at NIS 458 million; price target to be in the range of NIS 29.6 to NIS 31.8 with a mean of NIS 30.7.

Lead Analyst Dr. Tiran Rothman Equity.Research@frost.com Tel.: +972-9-9502888

SONOVIA June 13, 2021

Significant developments since the publication of our last update:

• On June 1, 2021, the company announced a strategic partnership with Delta. We see this as a significant step towards the company's transition to sales of machinery and chemical compounds, along with the expression of trust by a leading textile supplier in Sonovia's technology. Under the agreement, an industrial machine will be established at Delta's Innovation Center in Karmiel to pilot Sonovia's technology integration into leading international sportswear, lingerie, and fashion brands.
• On June 3, 2021, Sonovia announced an initial success as part of a non-binding pilot with Nur Ink Innovations. The pilot also examined the possibility of using digital printing with water-based pigment ink developed by Nur Ink Innovations on fabrics treated by Sonovia's technology. Tests conducted at an independent laboratory showed that the fabrics treated as aforesaid showed high efficacy against bacteria (at a rate of 99.9%).
• On May 13, 2021, the company announced the appointment of a market maker of the company's shares. This move is expected to increase the company's shares liquidity.
• On April 22, 2021, the company filed a provisional patent application in the US, for an applicative treatment for water repellency. This application follows the company's report of successful water repellency testing for fabrics, in collaboration with one of the world's largest suppliers of waterproof fabrics. If approved, the company could rely on the temporary application to file a regular patent until April 2022. To this date, we do not include the company's water repellency applicative treatment in our valuation. However, we do note that successful development and commercialization of a water repellency applicative treatment would significantly bolster Sonovia's competitive position and brand and would open a new and lucrative commercial market (valued at some \$800M per annum).

Sonovia is transitioning from a company primarily engaged in development to a mature company with substantial sales. We anticipate an increase in the company's revenues in the coming years alongside advances in technology development, increased marketing efforts, and rapid market penetration.

Investment Thesis

Sonovia is an Israeli high-tech company that focuses on the research and development of sound-based technology for performing value-added textile treatments in an environmentally friendly manner, which gives fabrics unique properties. Sonovia's anti-pathogenic application, which provides over 99% active protection against viruses (including covid-19), bacteria, and fungi, is already generating revenues (over \$9.5 million in 2020) and is tested by leading brands and manufacturers. The applicative water-repellent treatment developed by the company (for which the company filed a provisional patent application) was rated by an independent international laboratory, a rating of 100 under the international standard (AATCC-22), the highest rating under that standard. Additional applications - flame retardancy, dyeing, "DryFit", and more – are either in R&D, or in the company's R&D pipeline.

Sonovia operates within the textile industry, which is constantly growing yet is currently at a tipping point: Increased consumer awareness of and preference for textiles produced with a low ecological footprint, coupled with increasingly stringent regulation and enforcement of chemical use, are expected to drive a significant industrial change as manufacturers are already forced to seek innovative, 'green' solutions.

Sonovia's technology and its advantages over conventional methods and its ongoing activity with leading brands and OEMs across several key markets have the potential to disrupt the textile finishing and dyeing industries significantly and increase demand for new functional products. Realization of that potential depends greatly on successful entry into various verticals, achieving a global installation base, and creating brand awareness.

Sonovia's technology utilizes ultrasonic energy to physically infuse textiles with the required functional compounds, based on the required application, via a sustainable process. The Sono-finishing process eliminates the need for polymeric chemical binders and other harmful chemicals and dramatically reduces water and chemistry consumption in the process.¹ The result:

High performance: Sonovia's anti-pathogenic application displays 99.9% elimination of viruses, including SARS-COV-2, bacteria, and fungi;

¹ Chemical and water consumption varies per application.

• High durability: Fabrics treated with Sonovia's technology exhibit high durability to industrial and home laundry as well as to high temperatures;²
• Versatility: Sonovia's technology applies to all types of textiles;
• Cost-effectiveness and sustainability: Sonovia's technology may reduce up to 95% of the water consumption compared with conventional textile wet-finishing and eliminate chemical binders' need.

	Padding	Extrusion	Sono-finishing
Applicability to all textile compositions	Requires different formulas and chemical binders	Only synthetic	Yes
Durability to industrial laundry	Moderate to poor	Very high	Very high3
Durability to home laundry	Moderate	High	Moderate (expected to improve with R&D)4
Durability to high-heat	Low	High	High
Cost-effectiveness	High	Low	High
Sustainability	Moderate to poor	Poor	High
Scalability	High	Low	High

The Sono-finishing process vis-à-vis traditional methods – a comparative overview

Source: Sonovia and F&S analysis

Sonovia operates two distinct departments:

• (1) The personal safety department, which currently operates a D2C model: Direct sales of branded personal protective products – such as the SonoMask – to end-clients in the private sector; In 2020, SonoMask sales exceeded \$9.5 million.
• (2) The Sono-applications department, which is due to operate under a B2B model:
  • Capital sales of machines; with Brückner Trockentechnik GmbH & Co. as the machinery partner, global market penetration is expected to be rapid and aggressive.
  • Repeating sales of required chemical formulations are expected to become the company's core revenue stream (the current install base of the Brückner alone is over 5,000 machines).
  • Potential revenues from "Sonovia-inside" trademark tags

2 Additional durability assessments to different washing protocols need to be executed.

³ Pending additional assessments

⁴ Pending additional assessments

The company's vision is to develop the world's most green and advanced technology for applicative textile treatments.

Sonovia operates within the functional textile finishing agents market was valued at \$5.2 billion in 2020 and is projected to exceed \$6.9 billion by 2027, at a CAGR of 3.9%. Sonovia estimates the TAM for its anti-pathogenic application for its four verticals – medical textiles, hospitality textiles, sportswear, and automotive upholstery – at an aggregated value of \$1.56 billion.

Sonovia also aims to enter the textile dyeing market, which was valued at \$9.4 billion in 2018 and is projected to reach \$15.5 billion by 2026, growing at a CAGR of 6.3% from 2019 to 2026. While Sonovia's entry into the textiles dyeing market is pending upon successful development and proof-of-concept, which are expected in the near future, its potential to disrupt the textile dyes market is equal – if not greater – than its potential to disrupt the textile finishing market.

In addition, the company operates under a European grant designed to support the fight against Hospital Acquired Infections (HAIs). Hospital Acquired Infections (HAIs) represent a persistent challenge in the healthcare sector, exacerbated by covid-19. HAIs affect hundreds of millions of patients worldwide each year, leading to significant morbidity and mortality as well as financial losses for health systems:

• 136,000 annual deaths in the US and Europe are attributed to HAIs.
• The direct financial burden of HAIs is estimated to account for €7 billion in Europe and \$6.5 billion in the US. Yet, research suggests that the total (direct + indirect) economic burden is significantly higher – up to \$45 billion per annum.

Textiles with anti-pathogenic properties show great promise in reducing the prevalence of HAIs and their associated economic burden. Evidence indicates that textiles treated with anti-pathogenic reduce HAIs rate dramatically and could result in cost reduction of up to €8,038 million. The severe impact of covid-19 on hospitals has elevated awareness of the speed and breadth with which HAIs spread in healthcare institutions and is expected to act as a catalyst on institutional demand for anti-pathogenic textiles, especially as novel solutions are proven effective in eliminating SARS-CoV-2 and other pathogens.

Covid-19 is also a catalyst for the rapidly growing interest in textiles with anti-pathogenic properties by additional verticals, such as the hospitality market, the sportswear market, and the automotive upholstery market. Sonovia holds a competitive advantage in the latter: Fabrics treated by Sonovia's durable antipathogenic application show elite anti-microbial and anti-viral performance while eliminating the use of hazardous chemicals.

We believe Sonovia is on a path for growth and success on a global scale:

• Sonovia develops a novel technological platform, envisioned to become the future incumbent technology for performing textile wet-finishing applications, in a versatile, cost-competitive and sustainable process.
• Sonovia's technology has been endorsed by the "Fashion for Good" accelerator and by the European Commission's SME program for its potential in fighting Hospital-acquired infections and dramatically reducing the ecological footprint of the fashion industry.
• Sonovia partnered with a globally-renowned designer and producer of finishing systems for textiles with a presence in 90 countries and an installed base of over 5,000 machines, and is already conducting pilot tests with leading brands in the fashion, sportswear, and automotive verticals, and has a clear strategy and R&D pipeline for the next 24 months.

Therefore, we view Sonovia as a good investment opportunity and value the company at NIS 458.4 million

Financial Analysis & Valuation

We conducted Sonovia's valuation under the DCF valuation method as Sonovia already has revenues and a solid business model. We also explored for industry multiples as benchmarking for Sonovia's value.

We also calculated Sonovia's equity value based on the following parameters:

• Non-operational assets/liabilities Company had \$17.7M cash as of 31/12/2020 with no loans.
• CapEx Over the life of an asset, total depreciation will be equal to the net capital expenditure. Sonovia plans to outsource the production of its' chemical formulations to leading chemical manufacturers. Thus, we don't expect any significant CapEx investment on behalf of the company in the forecasted period.
• Working capital (WC) changes based on the current balance sheet and future WC needs, we assume 60 days of working capital needs.
• CAPM we calculate CAPM to be at 19.61% (see appendix A).

Sensitivity analysis

The table below presents Sonovia's price matched with different capitalization rates (along with a 1.5% growth rate). We set a range of 0.5% change from our CAPM model (see Appendix A). The company has 14,968,144 shares as of 10/06/2021.

Cap. Rate (%)	Price target (NIS)
18.61	33.0
19.11	31.8
19.61	30.7
20.11	29.6
20.61	28.6

Valuation summary

We conducted Sonovia's valuation using market benchmarks such as market multiples; and analyzed bottom-up valuation using the DCF method. Given all the findings mentioned above and assessments. We value the company's stock price target to be in the range of NIS 29.6 and NIS 31.8; with a mean of NIS 30.7.

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