A2Z Smart Technologies (AZ) - 2024 Q3 - Quarterly Report

Condensed Interim Consolidated Statements of Financial Position Financial Position Overview Total assets increased, liabilities decreased, and shareholders' deficit improved as of September 30, 2024 - Current assets increased significantly, mainly due to a rise in cash and cash equivalents (from $2,267 Thousands USD to $3,366 Thousands USD) and trade receivables, net (from $1,477 Thousands USD to $2,283 Thousands USD)[4] - Current liabilities saw a substantial increase from $5,632 Thousands USD to $9,356 Thousands USD, primarily driven by higher trade payables and other accounts payable[4] Financial Position Summary (Thousands USD) | Metric | September 30, 2024 (Thousands USD) | December 31, 2023 (Thousands USD) | Change (Thousands USD) | Percentage Change | | :-------------------------- | :--------------------------------- | :--------------------------------- | :--------------------- | :------------------ | | Total Assets | 10,152 | 8,519 | 1,633 | 19.17% | | Total Liabilities | 10,656 | 10,828 | (172) | -1.59% | | Total Shareholders' Deficit | (504) | (2,309) | 1,805 | 78.17% | Condensed Interim Consolidated Statements of Loss and Comprehensive Loss Loss and Comprehensive Loss Overview Net loss significantly reduced for the nine months ended September 30, 2024, driven by lower operating expenses and warrant revaluation gain Key Financial Performance (Thousands USD) | Metric | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenues | 2,074 | 2,588 | 5,309 | 10,056 | | Gross profit | 746 | 368 | 1,196 | 2,027 | | Operating loss | (2,912) | (4,952) | (10,153) | (13,720) | | Loss (gain) on revaluation of warrant liability | 539 | (2,260) | (3,236) | 84 |\ | Net loss for the period | (3,533) | (2,588) | (7,103) | (13,853) | | Basic and diluted loss per share | (0.15) | (0.13) | (0.29) | (0.92) | - Revenues for the nine months ended September 30, 2024, decreased by 47.20% year-over-year, from $10,056 Thousands USD to $5,309 Thousands USD[5] - Operating loss for the nine months ended September 30, 2024, improved by 25.99% year-over-year, from $(13,720) Thousands USD to $(10,153) Thousands USD, primarily due to reduced general and administration expenses and R&D costs[5] Condensed Interim Consolidated Statements of Changes in Equity (Deficit) Equity (Deficit) Changes Shareholders' deficit significantly improved by September 30, 2024, primarily due to capital raises from share issuances Shareholders' Equity (Deficit) Changes (Thousands USD) | Metric | Balance Jan 1, 2024 | Net Loss for Period | Adjustments from Translation | Issuance of Shares | Share-based Compensation | Balance Sep 30, 2024 | | :-------------------------------- | :------------------ | :------------------ | :--------------------------- | :----------------- | :----------------------- | :------------------- | | Total Equity of Shareholder (Deficit) | (2,309) | (7,103) | (640) | 7,842 | 1,707 | (504) | - The company issued shares through private placements in January, April, and August 2024, raising gross proceeds of $2,022 Thousands USD, $3,318 Thousands USD, and $2,502 Thousands USD respectively, contributing to the increase in additional paid-in capital[7] - A 1-for-2.5 reverse stock split was approved on September 24, 2024, retroactively adjusting all share numbers and prices[7][9] Condensed Interim Consolidated Statements of Cash Flows Cash Flow Overview Net cash and cash equivalents increased, primarily due to substantial financing activities offsetting negative operating and investing cash flows Cash Flow Summary (Nine Months Ended September 30, Thousands USD) | Cash Flow Activity | 2024 | 2023 | | :----------------- | :------ | :------ | | Operating | (8,218) | (9,133) | | Investing | (108) | (255) | | Financing | 10,101 | 8,287 | | Net Increase (Decrease) in Cash | 1,775 | (1,101) | - Cash flows from operating activities remained negative but improved from $(9,133) Thousands USD in 2023 to $(8,218) Thousands USD in 2024, mainly due to adjustments for non-cash items like warrant liability revaluation gain and share-based compensation[11] - Financing activities generated substantial cash, increasing from $8,287 Thousands USD in 2023 to $10,101 Thousands USD in 2024, primarily from the issuance of shares and warrants[11] Notes to the Condensed Interim Consolidated Financial Statements NOTE 1 – NATURE AND CONTINUANCE OF OPERATIONS The company, focused on smart cart retail automation, faces significant going concern doubts due to recurring losses and war-related risks - The Company's primary product is the Cust2Mate system, a 'smart cart' for retail automation, which automatically calculates purchases and offers features like product information, on-cart scales, barcode scanners, and on-board payment systems[14][15] - The Company has incurred recurring losses and negative cash flows from operating activities since inception, with accumulated losses of $89,074 Thousands USD and a net loss of $7,103 Thousands USD for the nine months ended September 30, 2024, raising substantial doubt about its ability to continue as a going concern[18][19] - The ongoing Israel-Hamas war poses potential risks, including supply and demand irregularities, macroeconomic deterioration in Israel, and possible disruptions to operations due to military service call-ups of employees or service providers, with commercial insurance not covering war-related losses[20][22][23] NOTE 2 – BASIS OF PREPARATION Interim financial statements are unaudited, presented in USD under IAS 34, with critical estimates for assets and financial instruments, and no material impact from recent accounting standard changes - The financial statements are prepared in accordance with IAS 34 'Interim Financial Reporting' and are expressed in US Dollars, while the functional currency of the Company's subsidiaries is the New Israeli Shekel (NIS)[26][31] - Critical estimates and assumptions include the useful life of property and equipment, fair value determination for share-based payment transactions (using the Binomial model), impairment testing of intangible assets, and fair value estimation of warrant liabilities (using the Black-Scholes model)[32][33][34][35] - New accounting standards and amendments effective January 1, 2024 (IAS 1, IFRS 16, IAS 7, IFRS 7) had no material impact on the Company's interim consolidated financial statements. IFRS 18, effective January 1, 2027, is being reviewed for potential impact[40][43][45][49][50] NOTE 3 – WARRANT LIABILITY The company recorded a net gain on revaluation of various warrant liabilities for the nine months ended September 30, 2024, using the Black-Scholes model - Warrant liabilities are measured using the Black-Scholes option pricing model, with key assumptions including volatility, risk-free interest rate, expected life, and share price[51][53][56][59][62] Warrant Liability Revaluation (Nine Months Ended September 30, 2024, Thousands USD) | Warrant Type | Gain (Loss) on Revaluation | | :------------- | :------------------------- | | January 2024 | 657 | | December 2023 | 353 | | June 2023 | 934 | | March 2023 | 490 | | November 2022 | 803 | | Total | 3,237 | January 2024 Warrants January 2024 warrants, with a $3.75 exercise price, resulted in a $657k revaluation gain for the nine-month period - 561,260 January 2024 Registered Direct Offerings Warrants were issued with an exercise price of $3.75, exercisable for 2 years[51] January 2024 Warrant Revaluation (Thousands USD) | Period | Revaluation Gain (Loss) | | :----- | :---------------------- | | Q3 2024 | 237 | | YTD 2024 | 657 | December 2023 Warrants December 2023 warrants, with a $3.75 exercise price, resulted in a $353k revaluation gain for the nine-month period - 259,156 December 2023 Registered Direct Offerings Warrants were issued with an exercise price of $3.75, exercisable for 2 years[53] December 2023 Warrant Revaluation (Thousands USD) | Period | Revaluation Gain (Loss) | | :----- | :---------------------- | | Q3 2024 | 108 | | YTD 2024 | 353 | June 2023 Warrants June 2023 warrants, with a $5.50 exercise price, resulted in a $934k revaluation gain for the nine-month period - 763,654 June 2023 Registered Direct Offerings Warrants were issued with an exercise price of $5.50, exercisable for 2 years[56] June 2023 Warrant Revaluation (Thousands USD) | Period | Revaluation Gain (Loss) | | :----- | :---------------------- | | Q3 2024 | 150 | | YTD 2024 | 934 | March 2023 Warrants March 2023 warrants, with a US$4.44 exercise price, resulted in a $490k revaluation gain for the nine-month period - 356,711 March 2023 Warrants were issued with an exercise price of CAD$5.88 (US$4.44), exercisable for 2 years[59] March 2023 Warrant Revaluation (Thousands USD) | Period | Revaluation Gain (Loss) | | :----- | :---------------------- | | Q3 2024 | 38 | | YTD 2024 | 490 | November 2022 Warrants November 2022 warrants, with a US$4.00 exercise price, resulted in an $803k revaluation gain for the nine-month period - 595,666 November 2022 Warrants were issued with an exercise price of CAD$5.10 (US$4.00), exercisable for 2 years[62] November 2022 Warrant Revaluation (Thousands USD) | Period | Revaluation Gain (Loss) | | :----- | :---------------------- | | Q3 2024 | 2 | | YTD 2024 | 803 | NOTE 4 - SHAREHOLDERS EQUITY Share capital is unlimited, with significant capital raised through private placements and a 1-for-2.5 reverse stock split in 2024 - The Board approved a 1-for-2.5 reverse stock split on September 24, 2024, retroactively adjusting all share numbers, share prices, and exercise prices[66] Share Issuances from Private Placements (Nine Months Ended September 30, 2024, Thousands USD) | Placement Date | Shares Issued | Gross Proceeds | | :------------- | :------------ | :------------- | | January 2024 | 1,122,521 | 3,227 | | April 2024 | 3,792,200 | 3,300 | | August 2024 | 1,839,554 | 2,502 | - During the nine months ended September 30, 2024, 324,668 shares were issued upon the exercise of RSUs[65] NOTE 5 - WARRANTS AND OPTIONS Outstanding warrants and stock options increased by September 30, 2024, with new issuances and a decrease in share-based compensation expense Warrant and Stock Option Balances | Instrument | Balance, December 31, 2023 | Balance, September 30, 2024 | | :--------- | :------------------------- | :-------------------------- | | Warrants | 4,386,234 | 6,237,296 | | Stock Options | 1,422,887 | 1,841,337 | - New warrants issued in January 2024 (651,062) and pre-funded warrants in August 2024 (1,200,000) significantly increased the total outstanding warrants[67] Share-based Compensation Expense (Thousands USD) | Period | Stock Options (2024) | Stock Options (2023) | RSUs (2024) | RSUs (2023) | | :----- | :------------------- | :------------------- | :---------- | :---------- | | 3 Months | 690 | 752 | 853 | 377 | | 9 Months | 1,176 | 3,299 | 1,036 | 797 | Warrants Outstanding warrants increased to 6,237,296 by September 30, 2024, driven by new issuances in January and August Warrant Transactions (Nine Months Ended September 30, 2024) | Activity | Number of Warrants | | :-------------------------------------- | :----------------- | | Balance, January 1, 2023 | 2,822,789 | | Warrants issued in March 2023 | 413,785 | | Exercise of warrants | (36,800) | | Warrants issued in June 2023 | 885,838 | | Warrants issued in December 2023 | 300,622 | | Balance, December 31, 2023 | 4,386,234 | | Warrants issued in January 2024 | 651,062 | | Pre-Funded Warrants issued in August 2024 | 1,200,000 | | Balance, September 30, 2024 | 6,237,296 | Stock Options Outstanding stock options increased to 1,841,337 by September 30, 2024, with a notable decrease in share-based compensation expense Stock Option Transactions (Nine Months Ended September 30, 2024) | Activity | Number of Options | | :-------------------- | :---------------- | | Balance January 1, 2023 | 753,337 | | Options granted | 694,100 | | Expiry of options | (24,550) | | Balance December 31, 2023 | 1,422,887 | | Options cancelled | (133,550) | | Options granted (v) | 552,000 | | Balance September 30, 2024 | 1,841,337 | - On August 14, 2024, 552,000 stock options were issued to employees, consultants, and officers with an exercise price of $1.78, estimated at a fair value of $779 Thousands USD[70] RSUs Outstanding RSUs slightly decreased to 556,000 by September 30, 2024, while RSU share-based compensation expense increased RSU Transactions (Nine Months Ended September 30, 2024) | Activity | Number of RSUs | | :-------------------- | :------------- | | Balance, January 1, 2023 | 288,000 | | RSUs granted | 523,300 | | Expiry of RSUs | (36,666) | | Exercise of RSUs | (185,800) | | Balance, December 31, 2023 | 588,884 | | RSUs cancelled | (34,166) | | RSUs granted | 326,000 | | Exercise of RSUs | (324,668) | | Balance, September 30, 2024 | 556,000 | - On August 14, 2024, 326,000 Restricted Share Units (RSUs) were granted to officers and advisors[76] NOTE 6 - REVENUES Total revenues significantly decreased for the nine months ended September 30, 2024, primarily due to reduced smart cart project revenues Revenue Streams (Thousands USD) | Revenue Stream | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenues from services | 402 | 292 | 1,082 | 1,216 | | Revenues from leasing | 100 | 73 | 270 | 304 | | Revenues from sales of precision metal parts | 1,418 | 781 | 3,649 | 2,394 | | Revenues from smart carts project | 154 | 1,442 | 308 | 6,142 | | Total | 2,074 | 2,588 | 5,309 | 10,056 | - Revenues from smart carts projects decreased dramatically by 94.99% for the nine months ended September 30, 2024, from $6,142 Thousands USD to $308 Thousands USD[78] - Revenues from sales of precision metal parts increased by 52.42% for the nine months ended September 30, 2024, from $2,394 Thousands USD to $3,649 Thousands USD[78] NOTE 7 – OPERATING SEGMENTS The company operates three segments, with Smart Carts incurring the largest segment loss for the nine months ended September 30, 2024 - The three operating segments are: Services to the military/security markets as well as development of related products for the civilian and retail markets ('Advanced Engineering'), Retail automation solutions – Smart Carts ('Smart Carts'), and Manufacturing and selling of precision metal parts ('Precision Metal Parts')[80] Segment Performance (Nine Months Ended September 30, 2024, Thousands USD) | Segment | External Revenues | Segment Loss (Profit) | | :---------------- | :---------------- | :-------------------- | | Precision Metal Parts | 3,649 | (60) | | Advanced Engineering | 1,383 | 1,066 | | Smart Carts | 308 | 9,147 | | Total | 5,340 | 10,153 | - The Smart Carts segment experienced a significant decline in external revenues from $6,142 Thousands USD in 2023 to $308 Thousands USD in 2024 for the nine-month period, contributing to a substantial segment loss[79][81] NOTE 8 - FINANCIAL RISK FACTORS The company assesses Expected Credit Losses (ECL) using a statistical model, with no material ECL for receivables as of September 30, 2024 - ECL are measured as the unbiased probability-weighted present value of all cash shortfalls over the expected life of each financial asset, using a statistical model with risk parameters like probability of default, loss given default, and exposure at default[82] - The estimation of risk parameters incorporates historical, current, and forward-looking information, including macroeconomic factors and scenario analysis (base case, adverse, optimistic)[82] - ECL for trade and other account receivables were not material as of September 30, 2024, and December 31, 2023, in accordance with IFRS 9[83] NOTE 9 – SUBSEQUENT EVENTS Post-period, the company completed two registered direct offerings in October 2024, raising $5,858k, and effected a 1-for-2.5 reverse share split - On October 2, 2024, the Company closed a registered direct offering of 2,164,000 common shares at $1.875 per share, raising gross proceeds of $4,058 Thousands USD[85] - On October 8, 2024, the Company effected a 1-for-2.5 reverse share split of its common shares[85] - On October 15, 2024, the Company closed another registered direct offering of 642,860 common shares at $2.80 per share, raising gross proceeds of $1,800 Thousands USD[85]