10-Q: Citrine Global Pivots to Drones, Secures Grant Amidst Losses

Citrine Global, now SkyTech Global Corp., shifts focus to UAV and drone solutions, securing a NIS 12.5 million government grant despite ongoing financial losses and trading restrictions.

Summary

• Citrine Global, Corp. has changed its name to SkyTech Global Corp. and its subsidiary Cannovation Center Israel Ltd. to SkyTech Orion Ltd., reflecting a strategic pivot towards UAV and drone solutions.
• The company reported a net loss of $1,250,000 for the three months ended June 30, 2024, a significant increase from $676,000 in the same period last year.
• For the six months ended June 30, 2024, the net loss was $1,502,000, a slight improvement from $1,528,000 in the prior year.
• The company received a NIS 12.5 million (approximately $3.4 million) government grant for the establishment of the SkyTech Innovation and Production Center in Yerucham, Israel, focused on defense-grade UAV and drone solutions.
• Current assets decreased to $128,000 as of June 30, 2024, from $258,000 at December 31, 2023, with cash and cash equivalents at $3,000.
• Working capital deficiency worsened to $2,980,000 as of June 30, 2024, compared to $2,461,000 at December 31, 2023.
• The company became a delinquent filer during Q2, leading to restricted trading and no active market for its shares.
• An investment agreement with X Group for $250,000 lapsed due to non-remittance of funds.
• The option to increase the equity stake in iBOT Israel Botanicals Ltd. to 51% was not exercised, retaining a 19% interest.
• Convertible loan principal totaling $1,764,106 was converted into 176,010,600 common shares and an equal number of warrants at $0.01 per share.
• Golden Holdings Finance's stake in SkyTech Orion Ltd. was diluted to approximately 1% due to its failure to provide required support and personal guarantees, increasing CTGL Citrine Global Israel Ltd.'s holding to 69.5% and Beezhome Technologies Ltd.'s to 29.5%.
• An investment in Nanomedic Technologies Ltd. resulted in an impairment loss of $431,000, reducing its carrying amount to $18,000.

Sentiment

Score: 3

Explanation: The company faces severe financial distress, evidenced by increasing net losses, a worsening working capital deficiency, and critically low cash reserves. The delinquent filer status and lack of an active trading market are major red flags. While the government grant and strategic pivot to UAV/drone solutions offer a potential long-term positive, the immediate financial and operational challenges are overwhelming, making the outlook highly precarious.

Positives

• Secured a significant NIS 12.5 million (approximately $3.4 million) government grant for the SkyTech Innovation and Production Center, supporting a strategic pivot to UAV and drone solutions.
• Successfully renewed and extended a short-term loan with S.R. Accord Ltd. until March 31, 2027, increasing the facility to NIS 1,000,000 (approximately $280,000).
• Net cash used in operating activities improved to $30,000 for the six months ended June 30, 2024, compared to $97,000 in the prior year.
• Operating loss decreased to $667,000 for the six months ended June 30, 2024, from $1,081,000 in the prior year, and to $264,000 for the three months ended June 30, 2024, from $563,000.
• Completed a $137,000 investment from Deer Light Ltd. in exchange for 13.7 million common shares and warrants.
• Resolved a legal issue with a former consultant of Cannovation Center Israel Ltd. through a fully paid binding settlement agreement.

Negatives

• Reported a significant increase in net loss for the three months ended June 30, 2024, to $1,250,000 from $676,000 in the same period last year.
• Became a delinquent filer during Q2, resulting in restricted trading and no active market for its securities.
• Working capital deficiency worsened to $2,980,000 as of June 30, 2024, from $2,461,000 at December 31, 2023.
• Cash and cash equivalents decreased to $3,000 as of June 30, 2024, from $7,000 at December 31, 2023.
• An investment agreement with X Group for $250,000 lapsed due to the investor's failure to remit funds.
• Incurred a $431,000 impairment loss on its investment in Nanomedic Technologies Ltd.
• The option to increase the equity stake in iBOT Israel Botanicals Ltd. to 51% was not exercised due to economic uncertainty and a shift in strategic priorities.
• Golden Holdings Finance's stake in SkyTech Orion Ltd. was significantly diluted due to its failure to provide required support and personal guarantees.

Risks

• The ongoing war in Israel poses significant risks to operations, investments, and liquidity, causing widespread uncertainty and instability.
• The company's delinquent filer status has led to restricted trading and no active market for its shares, impacting liquidity and investor confidence.
• The company is incurring losses and cannot determine with reasonable certainty when it will achieve sustainable profits.
• Reliance on personal guarantees from the CEO and a director for credit facilities and government grants exposes these individuals to significant personal liability, which the company has undertaken to indemnify.
• The company's financial statements include significant estimates, particularly for fair value measurements of derivative liabilities and assets, which could differ from actual results.
• The company's business plan and ability to launch products in the U.S. and other territories have been impacted by the war in Israel, requiring revisions to business plans.
• The company faces regulatory risks in various jurisdictions for its plant-based wellness and pharma products, requiring approvals, licenses, and certifications.

Future Outlook

The company believes it has sufficient funds for its plans for the next twelve months, based on current cash balances and access to the Credit Facility. However, it is incurring losses and cannot determine with reasonable certainty when it will achieve sustainable profits. The company plans to revise and disclose its business plans in the future given the local situation in Israel, which has impacted its ability to launch products in the U.S. and other territories. The strategic focus has shifted towards developing and manufacturing defense-grade UAV and drone solutions through the new SkyTech Innovation and Production Center.

Management Comments

• Management is actively assessing the potential impacts of the war on operations, investments, and liquidity, analyzing risks to ongoing activities, ensuring asset stability, and preparing for different scenarios.
• The company believes it will have sufficient funds for its plans for the next twelve months from the issuance of these financial statements, based on current cash balances and access to the Credit Facility.
• As the company is embarking on its business plan, it is incurring losses and cannot determine with reasonable certainty when and if it will have sustainable profits.

Industry Context

The company is undergoing a significant strategic pivot from its initial focus on plant-based wellness and pharma solutions to the defense sector, specifically UAV and drone solutions, as evidenced by the name change to SkyTech Global Corp. and the government grant for the SkyTech Innovation and Production Center. This shift aligns with national strategic programs supporting the defense sector in Israel, potentially leveraging existing land assets. The original plant-based wellness market, projected to reach USD 7.6 trillion by 2030, remains a large but competitive space, where the company had planned to build an end-to-end strategy. The current geopolitical situation in Israel likely influenced this strategic re-evaluation, moving towards a sector with government support and potentially higher demand in the region.

Comparison to Industry Standards

• The global health and wellness market is expected to reach USD 7.6 trillion by 2030, growing at a CAGR of 5.5% from 2021 to 2030, indicating a large addressable market for the company's original plant-based wellness products.
• The global nutritional supplements market is expected to reach USD 624.7 billion by 2030, expanding at a CAGR of 7.1% from 2021 to 2030, driven by increasing health awareness.
• The dry mouth treatment market is expected to reach $1.81 billion by 2032, highlighting a specific niche within the oral care segment.
• The company's shift to UAV and drone solutions, particularly for defense, positions it in a rapidly evolving and technologically advanced sector, which often sees significant government investment and strategic importance, especially in regions with geopolitical tensions.

Management Changes

Corporate Governance

Legal Proceedings

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

Related Party Transactions

• Marketing, general and administrative expenses to related parties totaled $455,000 for the six months ended June 30, 2024.
• Expenses related to convertible loan terms with related parties totaled $34,000 for the six months ended June 30, 2024.
• Accounts payable to related parties amounted to $204,000 as of June 30, 2024.
• Accrued compensation to related parties was $2,175,000 as of June 30, 2024.
• Convertible notes with related parties totaled $2,260,000 as of June 30, 2024.
• Ora Elharar-Soffer (CEO) and Lior Asher (director) provided personal guarantees for the S.R. Accord Ltd. credit facility and a bank guarantee for the government grant, with the company undertaking to fully indemnify them.
• Golden Holdings Neto Ltd., a company in which former director Ilan Ben-Ishay holds shares, had its stake in Cannovation (SkyTech Orion Ltd.) diluted due to its failure to provide support and guarantees.
• Deer Light Ltd., associated with director Lior Asher, entered into consulting agreements for $11,000 per month (deferred) and an investment agreement for $137,000.
• The company converted $1,764,106 in outstanding convertible loan principal from Citrine LP 7, LP 8, and LP 9, which are related noteholders, into common shares and warrants.

Stakeholder Impact

• **Shareholders:** Existing shareholders face significant dilution from debt conversions and new share allocations, a worsening stockholders' deficit, and the inability to trade shares due to the delinquent filer status and lack of an active market. The strategic pivot to UAV/drones and the government grant could offer long-term value, but immediate prospects are negative.
• **Employees and Directors:** Management and directors, particularly CEO Ora Elharar-Soffer and director Lior Asher, are providing personal guarantees for company loans and grants, exposing them to significant personal liability, albeit with company indemnification. Share-based compensation is a notable expense.
• **Creditors:** Convertible noteholders have converted debt into equity, reducing immediate debt obligations but shifting their risk profile. Other lenders, like S.R. Accord Ltd. and Bank Mizrahi, have secured loans with company assets and personal guarantees.
• **Government (Israel):** The Israeli Ministry of Economy and Industry is a key supporter, providing a substantial grant for the SkyTech Innovation and Production Center, indicating strategic alignment with national defense and industrial development goals.
• **Customers/Partners (Future):** The strategic pivot to UAV/drone solutions targets a new customer base, potentially in the defense sector. The original plant-based wellness product lines are currently impacted by the war in Israel, delaying market entry.

Next Steps

• Establish the SkyTech Innovation and Production Center in Yerucham, Israel, utilizing the NIS 12.5 million government grant.
• Continue to develop and commercialize defense-grade UAV and drone solutions.
• Work with local authorities and partners to obtain regulatory approvals for product categories in target countries.
• Address the delinquent filer status to restore active trading in the company's securities.
• Seek additional funding or achieve positive operational cash flow to meet deferred consulting payments and improve liquidity.
• Continue to monitor and assess the impacts of the war in Israel on operations, investments, and liquidity.

Key Dates

Recommendation

The company is in a highly precarious financial position, marked by increasing net losses, a worsening working capital deficiency, and critically low cash reserves. The delinquent filer status has resulted in restricted trading and no active market for its shares, making any investment illiquid and speculative. While the strategic pivot to UAV/drone solutions and the government grant offer a potential long-term growth avenue, the immediate financial instability, coupled with the lapsed X Group investment and significant impairment losses, presents overwhelming risks. For any investor, the lack of an active market and the severe financial health indicators make this a strong 'sell' or 'avoid' recommendation, as the downside risks far outweigh any speculative upside.

Keywords

UAV, drone solutions, SkyTech Global Corp, Citrine Global, SEC filing, 10-Q, financial results, government grant, Israel operations, plant-based wellness, nutritional supplements, corporate name change, working capital deficiency, delinquent filer, convertible notes, related party transactions