Forafric PLC(AFRI) - 2023 Q3 - Quarterly Report

Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets The company's balance sheet as of June 30, 2023, shows an increase in total assets, primarily driven by a significant rise in inventories, while total liabilities also increased substantially, leading to a decrease in total stockholders' equity compared to December 31, 2022 | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :---------------------- | :--------------------------- | :------------------------------- | | Total Assets | $341,636 | $307,164 | | Total Liabilities | $307,273 | $262,209 | | Total Stockholders' Equity | $34,363 | $44,955 | | Inventories, net | $66,471 | $27,218 | | Accounts payable | $65,426 | $27,295 | Condensed Consolidated Statements of Operations and Comprehensive Loss For the six months ended June 30, 2023, the company reported a net loss attributable to the Company of $(8,622) thousand, an increase from $(8,245) thousand in the prior year period, with revenues decreasing and a shift from operating income to an operating loss | Metric | Six months ended June 30, 2023 (in thousands) | Six months ended June 30, 2022 (in thousands) | | :----------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Revenues | $145,616 | $154,992 | | Gross profit | $13,647 | $15,111 | | Operating (loss) income | $(1,377) | $415 | | Net loss attributable to the Company | $(8,622) | $(8,245) | | Loss per ordinary shares outstanding – basic and diluted | $(0.32) | $(0.39) | Condensed Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity decreased from $44,955 thousand at January 1, 2023, to $34,363 thousand at June 30, 2023, primarily due to net loss and foreign exchange losses, partially offset by share-based compensation and shares issued upon warrant exercise | Metric | June 30, 2023 (in thousands) | January 1, 2023 (in thousands) | | :----------------------------------- | :--------------------------- | :----------------------------- | | Total Stockholders' Equity | $34,363 | $44,955 | | Accumulated deficit | $(111,300) | $(102,678) | | Accumulated other comprehensive loss | $(5,272) | $(2,984) | - Net loss for the six months ended June 30, 2023, was $(8,576) thousand, contributing to the accumulated deficit[12] - Foreign exchange loss for the six months ended June 30, 2023, was $(2,288) thousand[12] Condensed Consolidated Statements of Cash Flows The company experienced a significant improvement in cash flows from operating activities, shifting from a net cash usage of $(50,133) thousand in H1 2022 to a net cash provision of $10,738 thousand in H1 2023, while cash used in investing activities increased and financing activities shifted to a usage due to reduced borrowings and debt repayments | Metric | Six months ended June 30, 2023 (in thousands) | Six months ended June 30, 2022 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by (used in) operating activities | $10,738 | $(50,133) | | Net cash used in investing activities | $(4,187) | $(3,192) | | Net cash (used in) provided by financing activities | $(3,931) | $77,157 | | Net increase in cash and cash equivalents | $328 | $21,903 | | Cash and cash equivalents, end of period | $25,155 | $36,296 | Notes to Condensed Consolidated Financial Statements 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION Forafric Global PLC is a market leader in the Moroccan milling industry, offering a range of products, and completed a business combination on June 9, 2022, accounted for as a reverse recapitalization, with its unaudited condensed consolidated financial statements prepared in accordance with US GAAP for interim financial information - Forafric Global PLC is a market leader in the milling industry in Morocco, with a complete offering of flours, semolina, pasta, couscous, rice, and starches[17] - The business combination with Globis Acquisition Corp. was consummated on June 9, 2022, and accounted for as a reverse recapitalization, with FAHL as the accounting acquirer[19][21] - The accompanying Unaudited Condensed Consolidated Financial Statements are prepared in accordance with US GAAP for interim financial information[24] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section details the company's significant accounting policies, including the use of estimates, principles of consolidation, and accounting for share-based compensation, foreign currency, and fair value measurements, noting its status as an Emerging Growth Company (EGC) and management's assertion of sufficient liquidity for at least one year - Significant accounting policy elections, estimates, and assumptions include allowance for credit losses, valuation of goodwill and intangible assets, useful lives of long-lived assets, and measurement of income tax assets[26] - The company's functional currency is the Moroccan dirham (MAD), and its presentation currency is the United States Dollar (USD)[32] - Foreign currency forward contracts are not designated as hedging instruments; changes in fair value are recorded in current period earnings[34] - The company is an Emerging Growth Company (EGC) and has elected to use the extended transition period for adopting new or revised accounting standards[42] - Management believes that cash on hand, cash from operations, and proceeds from extended credit lines will provide sufficient liquidity to fund operations for at least one year[44] 3. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS No new accounting pronouncements issued or effective during the six months ended June 30, 2023, are expected to have a material impact on the condensed consolidated financial statements - No accounting pronouncements issued or effective during the six months ended June 30, 2023, have had or are expected to have a material impact on the condensed consolidated financial statements[45] 4. LEASES The company holds both operating and finance leases for various assets, including real estate and equipment, with total lease liabilities increasing to $3,489 thousand as of June 30, 2023, and weighted-average remaining lease terms of 5.3 years for operating leases and 0.8 years for finance leases | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :---------------------- | :--------------------------- | :------------------------------- | | Total Right-of-use assets | $12,185 | $10,430 | | Total Lease Liabilities | $3,489 | $2,901 | | Lease Type | June 30, 2023 | December 31, 2022 | | :--------------- | :------------ | :---------------- | | Operating leases | 5.3 years | 6.4 years | | Finance leases | 0.8 years | 0.8 years | | Lease Cost Component | Six months ended June 30, 2023 (in thousands) | Six months ended June 30, 2022 (in thousands) | | :------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Operating lease cost | $246 | $342 | | Finance lease cost | $278 | $371 | | Total lease cost | $524 | $713 | 5. ACCOUNTS RECEIVABLE Accounts receivable, net of allowance for credit losses, slightly decreased to $30,444 thousand at June 30, 2023, from $30,858 thousand at December 31, 2022, with the allowance for credit losses increasing by $1,210 thousand during the six months ended June 30, 2023 | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------------ | :--------------------------- | :------------------------------- | | Accounts receivable | $45,721 | $44,925 | | Allowance for credit losses | $(15,277) | $(14,067) | | Total | $30,444 | $30,858 | - Current period provision for expected credit losses was $(413) thousand for the six months ended June 30, 2023[55] 6. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets saw a slight increase to $16,540 thousand at June 30, 2023, from $16,345 thousand at December 31, 2022, primarily driven by increases in value-added tax receivable and advances to suppliers | Component | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------------- | :--------------------------- | :------------------------------- | | Value-added tax receivable | $933 | $602 | | Prepaid income taxes | $1,307 | $1,763 | | Advances to suppliers | $4,792 | $4,000 | | Prepaid expenses | $1,352 | $1,445 | | Insurance recoveries | $4,971 | $4,708 | | Other current assets | $3,185 | $3,827 | | Total | $16,540 | $16,345 | 7. INVENTORIES, NET Inventories, net, significantly increased to $66,471 thousand at June 30, 2023, from $27,218 thousand at December 31, 2022, primarily due to a substantial growth in raw materials and consumable supplies | Component | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------------------ | :--------------------------- | :------------------------------- | | Merchandise | $1,004 | $825 | | Raw materials and consumable supplies | $60,133 | $21,537 | | Finished Goods | $5,334 | $4,856 | | Total | $66,471 | $27,218 | 8. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment, net, increased to $107,427 thousand at June 30, 2023, from $100,527 thousand at December 31, 2022, with depreciation expense for the six months ended June 30, 2023, totaling $2,009 thousand | Component | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------------------ | :--------------------------- | :------------------------------- | | Land | $25,321 | $23,988 | | Buildings | $58,517 | $55,542 | | Machinery and equipment | $55,471 | $51,374 | | Assets in progress | $10,968 | $8,458 | | Others | $9,224 | $8,679 | | Total | $159,500 | $148,041 | | Less accumulated depreciation | $(52,073) | $(47,514) | | Total, net | $107,427 | $100,527 | - Depreciation expense was $2,009 thousand for the six months ended June 30, 2023, compared to $2,185 thousand for the same period in 2022[58] 9. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill increased to $48,298 thousand at June 30, 2023, from $45,898 thousand at December 31, 2022, primarily due to foreign currency exchange adjustments, while intangible assets, net, also saw a slight increase to $3,867 thousand, with no impairment losses identified in the annual assessment as of December 31, 2022 | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------------------------ | :--------------------------- | :------------------------------- | | Goodwill | $48,298 | $45,898 | | Intangible assets, net | $3,867 | $3,723 | - Goodwill increased by $2,400 thousand due to foreign currency exchange adjustments for the six months ended June 30, 2023[60] - The weighted-average remaining amortization period for intangibles other than goodwill is 10.6 years as of June 30, 2023[61] 10. ACCRUED EXPENSES Accrued expenses decreased to $17,881 thousand at June 30, 2023, from $18,974 thousand at December 31, 2022, mainly driven by a decrease in accrued interest, partially offset by an increase in consideration payable to the selling stockholder | Component | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------------- | :--------------------------- | :------------------------------- | | Consideration payable to selling stockholder | $8,517 | $8,200 | | Accrued government taxes | $5,825 | $5,517 | | Accrued interest | $2,044 | $3,781 | | Accrued salaries and benefits | $729 | $600 | | Accruals to social agencies | $540 | $664 | | Other accrued expenses | $226 | $212 | | Total | $17,881 | $18,974 | 11. LINES OF CREDIT The company utilizes unsecured revolving credit agreements for working capital, providing approximately $51,000 thousand, and asset-based credit facilities for wheat inventory purchases, providing approximately $166,000 thousand, secured by inventory - The company has unsecured revolving credit agreements for working capital, providing up to approximately $51,000 thousand, with interest rates ranging from 5.6% to 7.5%[63] - Asset-based credit facilities for wheat raw material purchases provide up to approximately $166,000 thousand, secured by the company's inventory, with interest rates ranging from 1.4% to 7.5%[65] 12. LONG-TERM DEBT Total outstanding debt slightly increased to $15,268 thousand at June 30, 2023, from $15,245 thousand at December 31, 2022, comprising term loans and lease obligations, with a significant portion scheduled to mature in the remainder of 2023 and 2024 | Component | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------- | :--------------------------- | :------------------------------- | | Loans | $11,779 | $12,344 | | Leases | $3,489 | $2,901 | | Total outstanding debt | $15,268 | $15,245 | | Less current portion | $(6,031) | $(5,417) | | Total long-term debt | $9,237 | $9,828 | - Term loans are unsecured with fixed monthly payments and interest rates ranging from 5.5%-7.5%, maturing through 2034[67] | Maturity Period | Amount (in thousands) | | :---------------- | :-------------------- | | Remainder of 2023 | $3,268 | | 2024 | $3,831 | | 2025 | $2,799 | | 2026 | $2,331 | | 2027 | $1,728 | | Thereafter | $1,311 | | Total | $15,268 | 13. FOREIGN CURRENCY FORWARD CONTRACTS The company uses foreign currency forward contracts to mitigate foreign exchange rate fluctuations, with 58 outstanding contracts as of June 30, 2023, having a notional value of $31.6 million and €32.4 million ($35.2 million) expiring by December 31, 2023, resulting in a recorded loss of $1,614 thousand for the six months ended June 30, 2023 - The company entered into foreign currency forward contracts from the beginning of 2023 to reduce foreign exchange rate fluctuation risk[70] - These contracts are not designated as hedging instruments, and changes in fair value are recorded in current period earnings[71] - As of June 30, 2023, there were 58 outstanding contracts with a notional value of $31.6 million and €32.4 million ($35.2 million), all expiring by December 31, 2023[73] - A loss on foreign exchange forward contracts of $1,614 thousand was recorded for the six months ended June 30, 2023[74] 14. CONTINGENT CONSIDERATION LIABILITY The contingent consideration liability, stemming from the Business Combination Agreement, represents 20% of cash proceeds from warrant exercises payable to the seller, valued at $1,268 thousand as of June 30, 2023, and measured at fair value using a Level 3 probability-weighted scenario-based model - The contingent consideration liability obligates the company to pay the seller 20% of cash proceeds from the exercise of Company Warrants[75] - The fair value of the contingent consideration liability was $1,268 thousand as of June 30, 2023[77] - The liability is measured using a probability weighted scenario-based model under Level 3 inputs, with a weighted average discount rate of 4.94% as of June 30, 2023[77][78] 15. INCOME TAXES Income tax expense decreased to $646 thousand for the six months ended June 30, 2023, from $1,605 thousand in the prior year, with an effective tax rate of -8% due to unrecognized tax losses and minimum contribution, and the company holds $12,313 thousand in net operating losses with a valuation allowance for indefinite carryforward losses | Component | Six months ended June 30, 2023 (in thousands) | Six months ended June 30, 2022 (in thousands) | | :--------------------- | :-------------------------------------------- | :-------------------------------------------- | | Current | $522 | $1,366 | | Deferred | $124 | $239 | | Total income tax expense | $646 | $1,605 | - The effective tax rate was -8% for the six months ended June 30, 2023, primarily due to unrecognized tax losses and minimum contribution[81] - The company has $12,313 thousand in net operating losses as of June 30, 2023, with a valuation allowance maintained for all losses to be carried forward indefinitely[82][83] 16. STOCKHOLDERS' EQUITY This note details the company's capital structure, including authorized and outstanding Preferred, Ordinary, and Class Z Ordinary Shares, with 26,879,202 Ordinary Shares outstanding as of June 30, 2023, and Public and Private Warrants outstanding, though no Earnout Shares have been issued - The company is authorized to issue 1,000,000 Preferred Shares and 100,000,000 Ordinary Shares[84][85] - As of June 30, 2023, 26,879,202 Ordinary Shares were issued and outstanding[85] - Class Z Ordinary Shares, previously 29,999,990 outstanding at December 31, 2022, were retired by June 30, 2023[12][86] - There were 11,461,120 Public Warrants and 4,289,722 Private Warrants outstanding as of June 30, 2023, each entitling the holder to purchase one ordinary share at $11.50[87][90] - No Earnout Shares have been issued as of June 31, 2023, under the Stockholder Earn-Out Rights provisions[91] 17. EQUITY INCENTIVE PLAN The company's Equity Incentive Plan allows for the grant of stock options and phantom options to employees, directors, and consultants, with 64,705 stock options and 53,613 phantom options outstanding as of June 30, 2023, and unrecognized compensation expense of $712 thousand for stock options and $561 thousand for phantom options to be recognized over 30 months - The Equity Incentive Plan reserves a maximum of 10% of the issued share capital, not exceeding 2,645,684 shares, for awards[93] | Metric | Stock Options (June 30, 2023) | Phantom Options (June 30, 2023) | | :-------------------------------------- | :---------------------------- | :------------------------------ | | Outstanding | 64,705 | 53,613 | | Weighted Average Exercise Price | $0.001 | $0.001 | | Weighted Average Remaining Contractual Term (years) | 9.88 | 9.89 | | Aggregate Intrinsic Value (thousands) | $712 | $588 | - Unrecognized compensation expense for stock options is $712 thousand and for phantom options is $561 thousand, both to be recognized over 30 months from June 30, 2023[97][99] 18. EARNINGS PER SHARE Basic and diluted loss per ordinary share was $(0.32) for the six months ended June 30, 2023, an improvement from $(0.39) in the prior year, despite an increased net loss, due to a higher weighted average number of shares outstanding, with earnout, option shares, and warrants excluded from diluted EPS calculations as their inclusion would be anti-dilutive | Metric | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :-------------------------------------- | :----------------------------- | :----------------------------- | | Loss per ordinary shares outstanding – basic and diluted | $(0.32) | $(0.39) | | Weighted average number of shares outstanding – basic and diluted | 26,879,114 | 21,566,289 | - The computation of diluted loss per share excludes the effect of earnout and option shares and warrants because their inclusion would be anti-dilutive[102] 19. COMMITMENTS AND CONTINGENCIES The company is involved in litigation with no expected material impact, has a five-year supply agreement with Millcorp extended through March 2026 for at least 80% of annual cereal requirements, holds bank commitments with collateral and mortgages totaling $25,464 thousand, and expects insurance recoveries of $4,708 thousand for 2022 wheat quality damages - The company has a five-year supply agreement with Millcorp Geneva SA, extended through March 2026, to obtain at least 80% of its annual common wheat, durum wheat, or other cereal requirements[104] | Purchases from Millcorp | Six months ended June 30, 2023 (in thousands) | Six months ended June 30, 2022 (in thousands) | | :---------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total | $97,641 | $126,065 | - The company has provided collateral and mortgages to banks totaling $25,464 thousand as of June 30, 2023[105] - Insurance recoveries of $4,708 thousand are expected for damages caused by non-conforming quality of imported wheat in 2022[108] 20. SEGMENT INFORMATION The company manages its operations across three reportable segments: Soft Wheat, Durum Wheat, and Couscous & Pasta, with total sales to external customers decreasing to $145,616 thousand in H1 2023 from $154,992 thousand in H1 2022, all segments reporting operating losses, and approximately 11.4% of net sales generated from customers outside Morocco in H1 2023 - The company's reportable segments are Soft Wheat (flour for desserts/sauces), Durum Wheat (flour for pasta), and Couscous & Pasta (secondary processed products)[110][111] | Segment | Sales to external customers (H1 2023, in thousands) | Sales to external customers (H1 2022, in thousands) | | :------------------ | :------------------------------------------------ | :------------------------------------------------ | | Soft Wheat | $105,386 | $115,856 | | Durum Wheat | $25,347 | $22,316 | | Couscous & Pasta | $14,883 | $16,820 | | Total | $145,616 | $154,992 | | Segment | Direct Operating (loss) income (H1 2023, in thousands) | Direct Operating (loss) income (H1 2022, in thousands) | | :------------------ | :--------------------------------------------------- | :--------------------------------------------------- | | Soft Wheat | $(187) | $2,884 | | Durum Wheat | $(225) | $(653) | | Couscous & Pasta | $(965) | $(1,816) | | Operating (loss) income | $(1,377) | $415 | - Net sales from customers outside of Morocco constituted approximately 11.4% of total consolidated net sales for the six months ended June 30, 2023 (8.4% in Mali, 1.2% in Burkina, and 1.8% in other countries)[114] 21. RELATED PARTIES The company engages in various related party transactions, including a building lease agreement with a parent-owned company and a supply agreement with Millcorp, which provides 100% of the company's imported grain, with amounts due from related parties totaling $2,444 thousand and amounts due to related parties at $1,399 thousand as of June 30, 2023 - The company has a building lease agreement for its headquarters with a parent-owned company, with total rent of approximately $420 thousand per year through 2024[116] - Millcorp, a related party, provides 100% of the imported grain to the company, with purchases of $97,641 thousand for the six months ended June 30, 2023[117] | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------- | :--------------------------- | :------------------------------- | | Amounts due from related parties | $2,444 | $2,366 | | Amounts due to related parties | $1,399 | $1,801 | 22. SUBSEQUENT EVENTS In July 2023, the company completed the acquisition of a 90% stake in Société Industrielle de Minoterie du Sud (SIMS), a soft wheat milling company, for approximately $1.0 million plus assumed debt, aligning with its strategy to double crushing capacity in Morocco over the next two years - In July 2023, the company acquired a 90% stake in Société Industrielle de Minoterie du Sud (SIMS), a soft wheat milling company[122] - The acquisition cost was approximately $1.0 million, plus the assumption of SIMS' outstanding debt[123] - This acquisition is part of the company's strategy to double crushing capacity in Morocco over the next two years[122]