10-Q: Citrine Global Pivots to Drones Amid Losses, Israel War

Citrine Global reports increased net losses and a strategic pivot to defense-grade UAV solutions, driven by the Israel-Hamas war and a significant government grant.

Summary

• Net loss for the nine months ended September 30, 2024, increased to $1,882,000 from $1,649,000 in the prior year.
• Net loss for the three months ended September 30, 2024, increased to $380,000 from $121,000 in the prior year.
• Operating loss decreased for both the nine-month period ($930,000 vs. $1,605,000) and three-month period ($263,000 vs. $524,000) year-over-year, primarily due to reduced R&D and G&A expenses.
• Financing expenses, net, significantly increased to $952,000 for the nine months ended September 30, 2024, from $44,000 in the prior year, largely due to expenses related to IBOT and My Plant options.
• Cash and cash equivalents decreased from $7,000 at December 31, 2023, to $0 at September 30, 2024.
• Working capital deficiency increased to $3,187,000 at September 30, 2024, from $2,461,000 at December 31, 2023.
• The company received a NIS 12.5 million (approximately $3.4 million) government grant for the SkyTech Innovation and Production Center in Yerucham, focusing on defense-grade UAV and drone solutions.
• Citrine Global Corp. and its subsidiary Cannovation Center Israel Ltd. (now SkyTech Orion Ltd.) changed their names to SkyTech Global Corp. and SkyTech Orion Ltd., respectively, reflecting a strategic shift.
• Outstanding convertible loan principal of $1,764,106 was converted into 176,010,600 common shares and an equal number of warrants at $0.01 per share.
• An investment in Nanomedic Technologies Ltd. resulted in an impairment loss of approximately $431,000, reducing its carrying amount to $18,000.
• The company became a delinquent filer in Q2 2024, leading to restricted trading of its shares and no active market.

Sentiment

Score: 3

Explanation: While the company secured a significant government grant and is pivoting to a potentially high-growth defense sector, its current financial state is weak with zero cash, increased net losses, and a worsening working capital deficiency. The failure of a planned investment and the delinquent filer status are significant concerns. The strategic pivot offers future potential but comes with execution risks and current operational disruptions due to the conflict in Israel.

Positives

• Received a significant government grant of NIS 12.5 million (approximately $3.4 million) for the SkyTech Innovation and Production Center, supporting a strategic pivot to defense-grade UAV and drone solutions.
• The Yerucham industrial land asset, designated for the SkyTech Center, benefits from approximately 90% subsidized acquisition cost and potential 30% reimbursement of building and equipment costs from the Israeli Ministry of Economy, along with reduced corporate tax rates.
• Operating loss decreased for both the three-month period (from $524,000 to $263,000) and nine-month period (from $1,605,000 to $930,000) year-over-year.
• Net cash used in operating activities decreased from $148,000 in the nine months ended September 30, 2023, to $30,000 in the same period in 2024.
• Successfully renewed and increased a short-term loan with S.R. Accord Ltd. to NIS 1,000,000 (approximately $280,000) and extended its term until March 31, 2027.
• Successfully converted $1,764,106 of outstanding convertible loan principal into equity, reducing debt.

Negatives

• Net loss increased for both the three months ($380,000 vs. $121,000) and nine months ($1,882,000 vs. $1,649,000) ended September 30, 2024, compared to the prior year.
• Cash and cash equivalents dropped to $0 at September 30, 2024, from $7,000 at December 31, 2023.
• Working capital deficiency worsened to $3,187,000 at September 30, 2024, from $2,461,000 at December 31, 2023.
• Total liabilities increased to $5,665,000 at September 30, 2024, from $4,961,000 at December 31, 2023.
• An agreement with X Group for a $250,000 investment lapsed after only $21,000 was received, indicating difficulty in securing external funding.
• The option to increase equity interest in iBOT Israel Botanicals Ltd. to 51% was not exercised due to economic uncertainty and a shift in strategic priorities.
• An investment in Nanomedic Technologies Ltd. resulted in an impairment loss of approximately $431,000.
• The company became a delinquent filer in Q2 2024, leading to restricted trading of its shares and no active market.
• Golden Holdings Finance's ownership in Cannovation was diluted to approximately 1% due to its failure to provide required financial support and personal guarantees.

Risks

• Operations are headquartered in Israel, making results vulnerable to economic restrictions, political instability, and current military events, such as the Israel-Hamas war which has caused widespread uncertainty and disruptions.
• The company is incurring losses and cannot determine with reasonable certainty when it will achieve sustainable profits, indicating ongoing financial uncertainty.
• The company became a delinquent filer in Q2 2024, resulting in restricted trading of its shares and no active market, which impacts liquidity and investor confidence.
• Reliance on personal guarantees from the CEO and a director for credit facilities and government grants exposes these individuals to significant personal liability, despite indemnification agreements.
• The company's ability to execute its strategic pivot to UAV and drone solutions and realize the benefits of the government grant is subject to successful project execution, which may be impacted by the ongoing conflict and operational delays.
• The lapse of the X Group investment agreement highlights challenges in securing anticipated external funding, which could impact future capital needs.
• The company's financial statements are unaudited, which may present a higher risk compared to audited statements.

Future Outlook

The company plans to pivot its strategic focus towards defense-grade UAV and drone solutions, leveraging its government-supported industrial land in Yerucham, Israel, for the establishment of the SkyTech Innovation and Production Center. This center will include assembly lines, R&D laboratories, and advanced production systems. The company expects to continue incurring losses as it embarks on this new business plan and cannot determine with certainty when sustainable profits will be achieved. Future plans for global commercialization of plant-based wellness products, particularly in the U.S. market, are subject to revision due to the ongoing conflict in Israel.

Management Comments

• "Based on the Company's current cash balances, and the access to the Credit Facility noted above, the Company believes it will have sufficient funds for its plans for the next twelve months from the issuance of these financial statements."
• "As the Company is embarking on its business plan, it is incurring losses. It cannot determine with reasonable certainty when and if it will have sustainable profits."
• "Management initiated an internal review aimed at broadening the Company's scope of activity and preparing for additional areas of development. A particular focus was placed on the Company's government-supported industrial land in Yerucham, Israel a highly strategic asset with substantial potential, located in a designated national innovation and industrial zone."
• "This evaluation reflects management's view of the Yerucham site as a significant resource with substantial potential for long-term development and value creation for the Company."
• "We shall revise and disclose our business plans in the future given the local situation on the ground."

Industry Context

The company is shifting its strategic focus from plant-based wellness and pharma solutions to defense-grade UAV and drone solutions, a move likely influenced by the ongoing conflict in Israel and the availability of government grants for the defense sector. This pivot positions the company in a high-growth, technologically advanced industry, distinct from its original market. The global health and wellness market, including nutritional supplements, remains a large and growing sector, but the company's direct participation in this market has been disrupted by regional instability. The new focus aligns with national strategic programs in Israel, potentially offering a more stable and government-backed path for development compared to the consumer wellness market currently impacted by local conditions.

Comparison to Industry Standards

• NA

Management Changes

Corporate Governance

Legal Proceedings

• Cannovation Center Israel Ltd. filed a debt claim of NIS 1,512,983 (approximately USD 420,000) against Golden Holdings Neto Ltd. in insolvency proceedings in November 2024, for amounts due under prior agreements and commitments.
• A binding Settlement Agreement was reached and fully paid with a former consultant of Cannovation Center Israel Ltd. regarding management fees and notice period compensation.

Related Party Transactions

• Cannovation Center Israel Ltd. was incorporated with Beezhome Technologies Ltd. (owned by the CEO) and Golden Holdings Neto Ltd. as 20% shareholders each, while the Israeli Subsidiary holds 60%.
• Credit facility agreement with S.R. Accord Ltd. is supported by guarantees from CTGL Citrine Global Israel Ltd., Citrine Global Corp., Ora Elharar-Soffer (CEO), and Lior Asher (director). The company indemnifies the personal guarantors.
• Significant related party balances as of September 30, 2024, include accounts payable of $204,000, accrued compensation of $2,326,000, and convertible notes of $2,363,000.
• Consulting agreements with Deer Light Ltd. (associated with Lior Asher, a director) for $11,000 per month, with deferred payment terms.
• Investment agreement with Deer Light Ltd. for $137,000 in exchange for shares and warrants.
• Conversion of $1,764,106 in convertible loan principal from related noteholders (Citrine LP 7, LP 8, and LP 9) into common shares and warrants.
• Golden Holdings Finance's (a related party) ownership in Cannovation was diluted to approximately 1% due to its failure to provide required support and personal guarantees, while CTGL Citrine Global Israel Ltd. and Beezhome Technologies Ltd. (CEO-owned) increased their stakes.
• A digital bank guarantee for NIS 625,000 is backed by an unlimited personal guarantee from CEO Ora Elharar Soffer and a limited personal guarantee from Mr. Meir Aharon, who is engaged to build the SkyTech Center.
• The Board of SkyTech Orion Ltd. granted Anti-Dilution Protection to Beezhome Technologies Ltd. (owned by CEO Ora Elharar Soffer).

Stakeholder Impact

• Shareholders: Experience significant dilution from convertible debt conversion and new share issuances. Trading is restricted due to delinquent filer status, impacting liquidity. The strategic pivot to UAV/drone solutions could offer long-term value but introduces new risks and a shift from the original business model. Increased net losses and worsening working capital deficiency are negative.
• Employees/Management: CEO and a director (Ora Elharar Soffer and Lior Asher) have provided personal guarantees for company loans and grants, exposing them to significant personal liability, albeit with indemnification. Management is actively pursuing a strategic pivot and securing government funding.
• Creditors: Convertible noteholders converted debt to equity. S.R. Accord Ltd. has renewed and extended its credit facility, secured by company assets and personal guarantees. The debt claim against Golden Holdings Neto Ltd. indicates efforts to recover funds.
• Customers (future): The delay in launching wellness product lines impacts potential customers in that market. The new focus on defense-grade UAV/drone solutions targets a different customer base (government/defense sector).
• Suppliers: The company's financial condition and delays could impact relationships with suppliers, though the new government grant and construction contracts suggest future activity.

Next Steps

• Establish the SkyTech Innovation and Production Center in Yerucham, Israel, focusing on defense-grade UAV and drone solutions.
• Continue to develop and manufacture defense-grade UAV and drone solutions, including assembly lines, R&D laboratories, and testing facilities.
• Obtain all necessary regulatory approvals and licenses for the new product categories and activities in the defense sector.
• Work towards achieving positive operational cash flow to trigger deferred payments under consulting agreements.
• Potentially pursue a U.S. national stock exchange listing to accelerate option vesting and warrant exercisability.
• Raise at least $5 million in gross proceeds to enable payment of accrued interest on converted convertible notes.
• Revise and disclose business plans in the future, considering the evolving situation in Israel.
• Address the delinquent filer status to restore active trading of shares.

Key Dates

Recommendation

The company faces severe financial distress, evidenced by zero cash, increased net losses, and a worsening working capital deficiency. Its status as a delinquent filer has halted trading, making shares illiquid. While the strategic pivot to UAV/drone solutions and a government grant offer a potential future, the immediate financial health, operational disruptions from the Israel-Hamas war, and challenges in securing private capital (X Group failure) present substantial risks. The significant dilution of existing shareholders and the reliance on personal guarantees for financing further underscore the precarious position. A seasoned investor would likely view the current situation as highly speculative with significant downside risk and limited near-term upside given the lack of an active market.

Keywords

UAV solutions, Drone technology, Defense sector, Israel operations, SEC filing, 10-Q, Financial results, Net loss, Working capital, Government grant, Strategic pivot, Cannovation Center Israel Ltd., SkyTech Orion Ltd., Citrine Global Corp., SkyTech Global Corp., Plant-based wellness, Nutritional supplements, Related party transactions, Convertible notes, Share dilution, Delinquent filer, OTC market