A2Z Smart Technologies (AZ) - 2024 Q1 - Quarterly Report

Introduction Company Information A2Z Cust2Mate Solutions Corp., incorporated in 2018, is listed on NASDAQ and focuses on retail automation, military/security services, and automotive product development - A2Z Cust2Mate Solutions Corp. was incorporated on January 15, 2018, in British Columbia[9] - The company is listed on NASDAQ under symbol "AZ" and voluntarily delisted from TSX Venture Exchange on February 28, 2024[10] - Its primary product, the Cust2Mate smart cart, offers retail automation features including automatic value calculation, product information, and on-board payment[11][12] - Other activities include services for military and security markets, container leasing, maintenance of complex electronic systems, and FTICS product development for the automotive market[13][14] Condensed Interim Consolidated Financial Statements Condensed Interim Consolidated Statements of Financial Position As of June 30, 2024, total assets decreased by 15.26%, total liabilities reduced by 30.19%, and shareholders' deficit improved from $(2,309)K to $(340)K Key Financial Position Data (Thousands of US Dollars) | Metric | June 30, 2024 | December 31, 2023 | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | | Total Assets | 7,219 | 8,519 | -15.26% | | Total Liabilities | 7,559 | 10,828 | -30.19% | | Shareholders' Deficit | (340) | (2,309) | 85.23% | | Warrant Liability | 225 | 3,075 | -92.62% | Condensed Interim Consolidated Statements of Loss and Comprehensive Loss For the six months ended June 30, 2024, revenues decreased by 56.69%, but net loss improved by 77.22% due to a significant gain on warrant liability revaluation Key Loss and Comprehensive Loss Data (Thousands of US Dollars, except per share data) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | YoY Change (6 Months) | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Revenues | 1,538 | 2,860 | 3,235 | 7,468 | -56.69% | | Gross profit | 123 | 638 | 450 | 1,659 | -72.87% | | Operating loss | (3,519) | (4,738) | (7,241) | (8,768) | 17.42% | | Loss (gain) on revaluation of warrant liability | (421) | 2,749 | (3,775) | 2,344 | -261.05% | | Net loss for the period | (3,174) | (7,422) | (3,570) | (11,265) | 68.29% | | Net loss attributable to controlling shareholders | (2,570) | (6,968) | (2,403) | (10,541) | 77.22% | | Basic and diluted loss per share | (0.05) | (0.19) | (0.05) | (0.34) | 85.29% | Condensed Interim Consolidated Statements of Changes in Equity (Deficit) Shareholders' deficit improved from $(2,309)K to $(340)K by June 30, 2024, driven by $2,022K and $3,318K capital raises Key Changes in Shareholders' Equity (Deficit) (Thousands of US Dollars) | Metric | Balance - January 1, 2024 | Balance – June 30, 2024 | | :-------------------------------- | :------------------------ | :---------------------- | | Total Equity of shareholder of the Company (Deficit) | (2,309) | (340) | | Net comprehensive loss for the period | - | (4,040) | | Issuance of shares in January 2024 private placement | - | 2,022 | | Issuance of shares in April 2024 private placement | - | 3,318 | | Share based compensation | - | 669 | Condensed Interim Consolidated Statements of Cash Flows Operating cash outflow increased to $(7,629)K for six months ended June 30, 2024, resulting in a $(1,850)K net decrease in cash and $653K cash balance Key Cash Flow Data (Thousands of US Dollars) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | YoY Change (%) | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------- | | Cash flows from operating activities | (7,629) | (5,837) | -30.70% | | Cash flows from investing activities | (33) | (149) | 77.85% | | Cash flows from financing activities | 5,812 | 8,816 | -34.08% | | Increase (decrease) in cash and cash equivalents | (1,850) | 2,830 | -165.37% | | Cash and cash equivalents at end of period | 653 | 5,671 | -88.49% | Notes to the Condensed Interim Consolidated Financial Statements NOTE 1 – NATURE AND CONTINUANCE OF OPERATIONS Recurring losses and negative cash flows raise going concern doubts, while the Israel-Hamas war poses potential material adverse effects on operations - The company has incurred recurring losses and negative operating cash flows since inception, with accumulated losses of $85,859K and a net loss of $3,570K for the six months ended June 30, 2024[15] - Dependency on external funding raises substantial doubt about the company's ability to continue as a going concern[16] - The ongoing Israel-Hamas war may cause supply chain disruptions, macroeconomic deterioration, and personnel absences, potentially having a material adverse effect on the business[17][20] NOTE 2 – BASIS OF PREPARATION Interim financial statements are prepared under IAS 34, using NIS as functional currency and USD as presentation currency, with critical estimates for assets, liabilities, and ECLs - Financial statements are prepared under IAS 34 and presented in US dollars, with NIS as the functional currency[24][29] - Critical estimates include useful life of property and equipment, fair value of share-based payments (Binomial model) and warrant liabilities (Black-Scholes model), intangible asset impairment, and ECL measurement[30][31][32][33][34] - No changes to accounting policies or retrospective adjustments were required from adopting new amended standards (IAS 1 and IAS 8)[36] NOTE 3 – WARRANT LIABILITY Significant gains of $(421)K (three months) and $(3,775)K (six months) were recognized on warrant liability revaluation, calculated using the Black-Scholes model Gain (Loss) on Revaluation of Warrant Liability (Thousands of US Dollars) | Warrant Type | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :----------------------------- | | January 2024 Warrants | 138 | 894 | | December 2023 Warrants | 64 | 461 | | June 2023 Warrants | 112 | 1,084 | | March 2023 Warrants | 58 | 528 | | November 2022 Warrants | 69 | 805 | | Total (from P&L) | (421) | (3,775) | - Warrant liabilities are measured using the Black-Scholes option pricing model, considering volatility, risk-free interest rate, expected life, and share price[37][39][41][43][45] NOTE 4 - SHAREHOLDERS EQUITY In H1 2024, the company completed private placements and registered direct offerings, issuing common shares and pre-funded warrants, with director participation - On April 2, 2024, a private placement issued 4,147,326 common shares and pre-funded warrants for 2,697,168 common shares, generating approximately $2,400K in gross proceeds[49] - On January 4, 2024, a registered direct offering closed, issuing 2,806,302 units for gross proceeds of $3,227K[52] - On April 2, 2024, another registered direct offering closed, issuing 9,480,500 common shares for approximately $3,300K[52] - Certain directors and officers participated in the registered direct offering and private placement, investing $525K[51] NOTE 5 - WARRANTS AND OPTIONS As of June 30, 2024, 12,593,240 warrants (avg. $2.43) and 3,374,134 stock options (avg. $1.86) were outstanding, with decreased share-based compensation expense Outstanding Warrants and Stock Options (June 30, 2024) | Instrument | Number Outstanding | Weighted Average Exercise Price (USD) | | :---------------- | :----------------- | :------------------------------------ | | Warrants | 12,593,240 | $2.43 | | Stock Options | 3,374,134 | $1.86 | Share-Based Compensation Expense (Thousands of US Dollars) | Instrument | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------- | :----------------------------- | :----------------------------- | | Stock Options | 486 | 2,547 | | RSUs | 183 | 420 | - The company granted 1,265,000 RSUs in August 2022, 1,027,000 RSUs in January 2023, 116,250 RSUs in April 2023, and 165,000 RSUs in June 2023 to various stakeholders[58][59][60][61] NOTE 6 - REVENUES Total revenues for six months ended June 30, 2024, decreased by 56.69%, mainly due to a 96.75% decline in smart carts projects, despite a 38.40% increase in precision metal parts sales Revenue Streams (Thousands of US Dollars) | Revenue Stream | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | YoY Change (6 Months) | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Revenues from services | 315 | 393 | 681 | 924 | -26.29% | | Revenues from leasing | 79 | 98 | 170 | 231 | -26.41% | | Revenues from sales of precision metal parts | 1,047 | 795 | 2,231 | 1,612 | 38.40% | | Revenues from smart carts project | 97 | 1,574 | 153 | 4,701 | -96.75% | | Total Revenues | 1,538 | 2,860 | 3,235 | 7,468 | -56.69% | NOTE 7 – OPERATING SEGMENTS The company operates in three segments, with Smart Carts incurring the largest segment loss of $6,285K for the six months ended June 30, 2024 - The company operates in three segments: Advanced Engineering (military/security services), Smart Carts (retail automation), and Precision Metal Parts (manufacturing and sales)[66] Operating Segment Performance (Six Months Ended June 30, 2024, Thousands of US Dollars) | Segment | External Revenues | Segment Loss | | :-------------------- | :---------------- | :----------- | | Precision Metal Parts | 2,231 | 176 | | Advanced Engineering | 882 | 780 | | Smart Carts | 153 | 6,285 | | Total | 3,266 | 7,241 | Operating Segment Performance (Six Months Ended June 30, 2023, Thousands of US Dollars) | Segment | External Revenues | Segment Loss (Gain) | | :-------------------- | :---------------- | :------------------ | | Precision Metal Parts | 1,612 | 548 | | Advanced Engineering | 1,436 | (56) | | Smart Carts | 4,701 | 8,276 | | Total | 7,749 | 8,768 | NOTE 8 - FINANCIAL RISK FACTORS The company assesses ECLs for financial assets using a statistical model incorporating default probability and macroeconomic factors, with ECLs for receivables deemed not material - ECLs are measured as the unbiased probability-weighted present value of cash shortfalls over expected life, using a statistical model with risk parameters like probability of default and loss given default[68] - Risk parameter estimation incorporates historical, current, and forward-looking macroeconomic information, including GDP growth and unemployment rate, using scenario analysis[68] - As of June 30, 2024, and December 31, 2023, ECLs for trade and other account receivables were not material[69] NOTE 9 – SUBSEQUENT EVENTS Post-period, a $2,395K private placement closed, Nasdaq MVLS compliance was regained, but the bid price rule remains, and a new CFO was appointed - On August 12, 2024, a private placement closed, raising approximately $2,395K through common shares and pre-funded warrants[70] - On August 1, 2024, the company regained compliance with Nasdaq's MVLS requirement, maintaining at least $35 million for 14 consecutive trading days[70] - The company must still comply with Nasdaq Listing Rule 5550(a)(2), the Bid Price Rule, by October 21, 2024[70] - On August 12, 2024, Mr. Alan Rootenberg was appointed as the new Chief Financial Officer, replacing Gadi Levin[70]