Mr. Cristiano Veloso reports

VERDE ACHIEVES C$10.3 MILLION REVENUE, 81% GROSS MARGIN AND C$2.1 MILLION EBITDA IN THE SECOND QUARTER OF 2023

Verde Agritech Ltd. has released its financial results for the second quarter ended June 30, 2023 (Q2 2023).

"We are reassured by Verde's renewed net profit despite the most challenging fertilizer market conditions in recent years. Brazilian farmers have grappled with the convergence of the highest interest rates since 2006 and their dependence on credit. This peaked in Q2 2023, period when farmers must acquire inputs for the upcoming planting season, a challenge compounded by the dip in agricultural commodity prices exactly when their crops should be marketed. In this extraordinary context, foreign fertilizer companies with lower capital cost can offer better terms to Brazilian farmers, who have a difficult choice between the products they want to buy and the ones they can afford to finance," commented Cristiano Veloso, founder, president and chief executive officer of Verde.

Q2 2023 financials:

• Sales of Verde's multinutrient potassium products, Baks and K Forte, sold internationally as Super Greensand (the product), by volume in Q2 2023 were 107,000 tonnes, compared with 202,000 tonnes in Q2 2022.
• Revenue in Q2 2023 was $10.3-million, compared with $24.9-million in Q2 2022.
• Cash and trade receivables held by the company in Q2 2023 were $23.8-million, compared with $22.1-million in Q2 2022.
• EBITDA (earnings before interest, taxes, depreciation and amortization) before non-cash events in Q2 2023 was $2.1-million, compared with $10.8-million in Q2 2022.
• Total non-current assets in Q2 2023 were $69.6-million, compared with $40.9-million in Q2 2022.
• Net profit in Q2 2023 was $200,000, compared with a $9.6-million profit in Q2 2022.
• In Q2 2023, 8,480,000 tonnes of chloride have been prevented from being applied into soils by farmers who used the product in lieu of potassium chloride (KCl) fertilizers. A total of 129,682 tonnes of chloride have been prevented from being applied into soils by Verde's customers since the company started production.

"Amidst this landscape of market downturns, we acknowledge the potential for even greater performance in this quarter had Verde been able to compete on level ground with companies boasting larger financial resources and consequentially better credit terms for farmers. Achieving a profitable quarter in the face of adversities underscores our company's resilience and ability to navigate intricate markets, demonstrating our capacity to not only survive but also thrive under conditions where smaller players would often falter," stated Mr. Veloso.

"Currently, the agricultural market is showing early signs of recovery. Agricultural commodity prices are no longer experiencing a rapid decline and interest rates in Brazil have started to decrease from their elevated levels. We anticipate that these shifts will soon mitigate the extraordinary distortions that temporarily favoured competitors with lower capital costs, thereby easing the challenges of this competitive market environment," he concluded.

Subsequent events:

• In July, 2023, the company announced the carbon capture properties of its products as detailed by an independent study conducted at Newcastle University under the leadership of Prof. David Manning, PhD, a renowned soil scientist. The carbon dioxide (CO2) capture is inherent to the products and is estimated at 120 kilograms per tonne. The CO2 removal does not require any change to the products' production and farmland application methods, nor does it change the nutritional benefits to plants. As a result, in the production scenario of 50 million tonnes per year, Verde would be one of the world's largest carbon capture projects with a total of six million tonnes of CO2 permanently subtracted from the atmosphere every year.
• In July, 2023, Verde announced that it is in advanced negotiations to sell carbon credits to major international corporations that are established purchasers of permanent carbon offset. Currently, carbon credits for permanent carbon offset similar to Verde's are being sold at prices up to $500 (U.S.) per tonne.

Market overview

Commodity prices

The agricultural commodities market has been experiencing significant fluctuations on a downward trend for the last months, impacting the fertilizers market worldwide. The attached table shows the shifts in the price of some of the main commodities in Brazil.

Notably:

• Soybean: Average price experienced a 19-per-cent decline in H1 2023 compared with H1 2022, and a further decrease of 27 per cent in Q2 2023 compared with Q2 2022;
• Corn: Average price experienced a 20-per-cent decline in H1 2023 compared with H1 2022, and a further decrease of 28 per cent in Q2 2023 compared with Q2 2022;
• Coffee: Average price experienced a 22-per-cent decline in H1 2023 compared with H1 2022, and a decrease of 20 per cent in Q2 2023 compared with Q2 2022;
• Cotton: Average price experienced a 36-per-cent decline in H1 2023 compared with H1 2022, and a further decrease of 46 per cent in Q2 2023 compared with Q2 2022.

Brazilian economy

On Aug. 5, 2023, the Central Bank of Brazil lowered its monetary policy interest rate (Sistema Especial de Liquidacao e Custodia (SELIC)) by 0.5 per cent, from 13.75 per cent to 13.25 per cent. On Aug. 7, 2023, the Boletim Focus, a weekly report released by the bank and representing the collective outlook of financial institutions regarding crucial economic indicators, projected that the SELIC rate will reach 11.75 per cent per annum by the end of 2023.

The most recent instance of the bank reducing the SELIC occurred in August, 2020, when the rate decreased from 2.25 per cent to 2 per cent per annum as a response to the economic downturn induced by the COVID-19 pandemic. Following this, the Monetary Policy Committee (Copom) of the bank initiated a sequence of 12 consecutive rate hikes, commencing in March, 2021. This series unfolded against the backdrop of escalating prices in essential commodities like food, energy and fuel. Since August of the preceding year, the rate has remained fixed at 13.75 per cent per annum for seven consecutive periods.

Looking ahead to the conclusion of 2024, the projection envisages a decline in the SELIC rate to 9 per cent per annum. Both 2025 and 2026 are forecasted to witness a rate of 8.5 per cent per annum.

The latest economic activity indicators consistently align with a scenario of deceleration. Annual inflation has eased to 3.99 per cent in the past 12 months.

Agricultural inputs market and credit crunch

The current agricultural market landscape presents enormous challenges. The company is observing exceptional and extreme circumstances characterized by a sharp depletion of farmers' working capital due to a significant plunge in agricultural commodity prices, occurring precisely when farmers are ready to bring their crops to market.

As the prices of commodities initiated their downward trajectory in 2023, many farmers chose to delay their crop sales, anticipating a market rebound that would fetch more favourable prices. Unfortunately, the market continued to witness a persistent decline in commodity prices.

This convergence aligns precisely with the time frame when farmers need to buy essential agricultural inputs, including fertilizers, for the coming planting season. Consequently, farmers are grappling with challenges in financing their planting activities.

As a result, they opt to procure inputs from suppliers that provide extended payment terms, combined with the most competitive interest rates achievable. This strategy enables them to cover the expenses associated with these inputs after generating revenue from the imminent harvest, usually spanning a period of nine to 12 months.

Global market competition and financing

Amidst the most challenging conditions experienced by the fertilizer market in recent years, the company is grappling with a convergence of two critical factors: the highest interest rates since 2006 and the pressing credit requirements of farmers. These farmers are facing the dilemma of diminished working capital just when they need to acquire inputs for the imminent planting season. This challenge stems from the notable decline in agricultural commodity prices, which coincides with the period when their crops are due to be marketed.

Verde's average cost of debt is 16.6 per cent. To incentivize sales, Verde offers its customers a credit line that charges a spread to its finance cost to comprise operational costs, provisions and bad debt, leading to an average lending cost of 18.6 per cent for credit-based purchases. The company's ability to provide financing with longer tenors is considerably lower compared with international players, which translates into less competitive terms for its customers. Unlike its competitors, Verde does not have the option to incur most of its cost of debt in U.S.-dollar-denominated liabilities. Over all, the company is not able to provide financing for more than 20 per cent of its revenue due to constraints related to lines of credit.

On the other hand, Verde's international competitors benefit from significantly lower financing costs within their respective countries, along with larger financial capacities. This enables them to provide more attractive interest rates and commercial conditions to farmers, effectively conferring them a competitive advantage.

In this context, the competition within the agricultural inputs market grows more intense, and Verde's capacity to offer competitive credit terms faces constraints due to its higher cost of debt relative to its larger competitors.

The convergence of all the aforementioned factors during a specific time frame within crop cycles characterizes the current scenario as an atypical and extreme circumstance for Verde and for the agricultural sector in general.

Average KCl price

The price of potassium chloride (KCl) has exhibited a consistent downward trend since H2 2022. The average KCl CFR declined by 67 per cent in Q2 2023, compared with Q2 2022, with a sharp 40-per-cent decrease from January to July, 2023.

Exchange rate

The fluctuation in the exchange rate between the U.S. dollar and the Brazilian real during the quarter also influences the company's results. As the U.S. dollar weakened by 10 per cent against the Brazilian real during the year, Verde's sales revenue, priced based on potassium chloride, suffered a decline when converted to Brazilian reals.

The Canadian dollar devaluated by 6 per cent versus the Brazilian real in Q2 2023, with an average exchange rate of 3.76 reals in the quarter, compared with 3.99 reals in Q2 2022.

Mr. Veloso commented: "The confluence of these numerous factors gives rise to an exceptional scenario, not only for Verde but also for the broader agricultural sector. It is crucial to highlight though that these market conditions would not present the same level of challenge to us if it were not for the constraints on farmers' working capital."

Selected annual financial information

The attached table summarizes Q2 2023 financial results compared with Q2 2022.

External factors

Revenue and costs are affected by external factors including changes in the exchange rates between the U.S. dollar, Canadian dollar and Brazilian real along with fluctuations in potassium chloride spot CFR Brazil, agricultural commodities prices and interest rates, among other factors.

For further details, please refer to the market overview section (page 03).

Q2 2023 compared with Q2 2022

EBITDA and earnings per share

The company had an EBITDA of $2,102,000 in Q2 2023, compared with $10,764,000 in Q2 2022. This decrease can be mainly attributed to the factors below, outlined in greater detail within the market overview section (please refer to page 03):

• Extreme market conditions and working capital crunch: The current agricultural market scenario is characterized by extreme challenges, including a working capital crunch for farmers due to low agricultural commodity prices and financial market instability. Farmers are encountering difficulties in financing planting activities and are opting for extended payment terms with competitive interest rates from suppliers.
• Intensified competition and credit constraints: Larger international competitors benefit from lower financing costs within their countries and possess larger balance sheets. These advantages enable them to extend more appealing interest rates and favourable commercial terms to farmers when supplying products, giving them a distinctive competitive edge. Verde's capacity to offer competitive credit terms to farmers encounters limitations due to the company's higher cost of debt compared with these well-established competitors. This financial discrepancy impairs Verde's ability to match the financing terms offered by its competitors, impacting its appeal to farmers seeking more favourable credit options. The convergence of these factors magnifies the challenge posed by the extreme agricultural market conditions outlined earlier.
• Potassium chloride price decline: The average price of KCl CFR Brazil experienced a substantial 67-per-cent decrease in the quarter, with a sharp 40-per-cent decrease from January to July, 2023.
• Exchange rate fluctuations: The fluctuation in the U.S. dollar to Brazilian real exchange rate during the quarter also impacted the company's results. As the U.S. dollar depreciated by 10 per cent against the Brazilian real during the year, the value of sales in Brazilian real prices decreased.
• Shift in product mix due to constrained working capital: With many farmers facing restricted cash flows, there has been a noticeable shift toward opting for lower-value-added products. Consequently, the utilization of micronutrients, which do not fall within the essential NPK elements for plants, has witnessed a reduction. This shift has culminated in a decrease in the sales proportion of Baks, Verde's higher-margin product, from 15 per cent to 8 per cent in the second quarter of 2023.

Basic earnings per share was 0.5 cent for Q2 2023, compared with earnings of 18.9 cents for Q2 2022.

Product sales

Sales by volume decreased by 47 per cent in Q2 2023, to 107,000 tonnes sold, compared with 202,000 tonnes sold in Q2 2022, due to the circumstances summarized below. This decrease can be mainly attributed to the factors below, outlined in greater detail within the market overview section (please refer to page 03):

• Extreme market conditions and working capital crunch: The agricultural market faces unprecedented challenges, driven by low commodity prices and financial instability. Farmers struggle to secure financing for planting activities, leading them to opt for extended payment terms from suppliers, combined with the most competitive interest rates achievable.
• Intensified competition and credit constraints: Verde's international competitors benefit from lower financing costs and larger balance sheets, allowing them to offer better credit terms to farmers. Verde's higher cost of debt limits its ability to match these offers, accentuating the challenge posed by extreme market conditions.
• Potassium chloride price decline: The average price of potassium chloride (KCl) CFR Brazil saw a significant 67-per-cent decline in the quarter, with a sharp 40-per-cent drop from January to July, 2023.
• Exchange rate fluctuations: Shifting exchange rates, with the U.S. dollar depreciating by 10 per cent against the Brazilian real, impacted Verde's sales value in Brazilian real prices.

The conjunction of these factors brought specific challenges for Verde and impacted its product sale during the quarter.

Revenue

Revenue from sales decreased by 59 per cent in Q2 2023 to $10,305,000 from the sale of 107,000 tonnes of product, at average $96 per tonne sold, compared with $24,861,000 in Q2 2022 from the sale of 202,000 tonnes of product, at average $123 per tonne sold.

Average revenue per tonne excluding freight expenses (FOB (free on board) price) decreased by 31 per cent in Q2 2023 to $61 compared with $88 in Q2 2022 mainly due to the decrease in potassium chloride CFR Brazil, from $1,040 (U.S.) to $1,270 (U.S.) per tonne in Q2 2022 to $315 (U.S.) to $430 (U.S.) per tonne in Q2 2023. This reduction was partially offset by the 6-per-cent appreciation of the Brazilian real against the Canadian dollar.

Production costs

Production costs include all direct costs from mining, processing and the addition of other nutrients to the product, such as sulphur and boron. It also includes the logistics costs from the mine to the plant and related salaries.

Verde's production costs and sales price are based on the following assumptions:

1. Micronutrients added to Baks increase its production cost, rendering K Forte less expensive to produce;
2. Production costs vary based on packaging type, with bulk packaging being less expensive than big bags;
3. Plant 1 produces K Forte bulk, K Forte jumbo bag (sold in one-tonne bags), Baks bulk and Baks jumbo bag, while plant 2 exclusively produces K Forte bulk. Therefore, plant 2's production costs are lower than plant 1's costs, which produces two types of products and offers two types of packaging options each.

The attached table shows a breakdown of full-year 2023 Verde's production costs projection for Baks and K Forte, and what percentage of those costs is not controllable by management.

Verde calculates its total production costs as a weighted average of the production costs for Baks and K Forte, taking into account the production site and packaging type for each product. Therefore, comparing the company's production costs on a quarter-over-quarter basis may not be meaningful due to the varying proportions of the cost factors that impact each quarter.

Production costs decreased by 64 per cent in Q2 2023 to $1,914,000 compared with $5,332,000 in Q2 2022. Average cost per tonne decreased by 32 per cent in Q2 2023 to $18 compared with $26 in Q2 2022.

Despite a 47-per-cent decrease in sales volume to 107,000 tonnes in Q2 2023 compared with 202,000 tonnes in Q2 2022, the average production cost in Brazilian reals decreased to 66.73 reals in Q2 2023, compared with 105.18 reals in Q2 2022, excluding cost depreciation.

This cost reduction can be mainly attributed to changes in the sales mix of packaging type, with a decrease in the percentage of products sold in jumbo bags to 21 per cent in Q2 2023, compared with 39 per cent in Q2 2022.

Similarly, the sales mix between Baks and K Forte also underwent a shift, with the percentage of Baks sales decreasing to 8 per cent in Q2 2023, compared with 15 per cent in Q2 2022, as many farmers are opting for lower-value-added products, due to restricted cash flows. Consequently, the utilization of micronutrients, which do not fall within the essential NPK elements for plants, has witnessed a reduction.

Sales expenses

Sales and marketing expenses

Sales and marketing expenses include employees' salaries, car rentals, travel within Brazil, hotel expenses and the promotion of the product in marketing events.

Sales and marketing expenses increased by 45 per cent in Q2 2023 to $1.03-million compared with $711,000 in Q2 2022.

This increase can be primarily attributed to the implementation of a field sales team, which resulted in expenses related to salaries, car rentals and travel. Additionally, the company made additional investments in events and media, as part of its sales strategy.

Fees paid to independent sales agents

As part of Verde's marketing and sales strategy, the company pays out commissions to its independent sales agents.

Fees paid to independent sales agents decreased by 74 per cent in Q2 2023 to $94,000 compared with $359,000 in Q2 2023, in accordance with the decrease in revenue for the quarter.

Product delivery freight expenses

Product delivery freight expenses decreased by 47 per cent in Q2 2023 to $3,723,000 compared with $7.04-million in Q2 2022. This reduction can be attributed to the lower sales volume on a cost, insurance and freight (CIF) basis, which decreased to 73,000 tonnes in Q2 2023, down from 138,000 tonnes in Q2 2022. Notably, the volume sold as CIF as a percentage of the total sales in the quarter remained stable at 68 per cent during this period.

In Q2 2023, the average freight cost per tonne of the product sold on a CIF basis was $34.53, slightly lower compared with $34.81 in the previous year.

General and administrative expenses

General administrative expenses

These costs include general office expenses, rent, bank fees, insurance, foreign exchange variances, and remuneration of executive and administrative staff in Brazil.

General administrative expenses increased by 128 per cent in Q2 2023 to $888,000 compared with $389,000 in Q2 2022. This increase can primarily be attributed to severance costs, with an expected cumulative annual cost reduction of $588,000.

Furthermore, in Q2 2023, the company set aside a bad debt provision of $25,000, within the total revenue of $75-million generated over the preceding 12 months. As outlined in Verde's sales policy, any outstanding customer payments overdue for more than 12 months are required to be provisioned.

Legal, professional, consultancy and audit costs

Legal and professional fees include legal, professional, consultancy fees along with accountancy, audit and regulatory costs. Consultancy fees are consultants employed in Brazil, such as accounting services, patent process, lawyer's fees and regulatory consultants.

Expenses increased by 278 per cent in Q2 2023 to $290,000 compared with $77,000 in Q2 2022. The primary reason for this increase can be attributed to higher expenditures linked to the company's redomiciliation to Singapore. This transition encompassed the engagement of Singaporean accounting, auditing, legal and corporate secretariat service firms as third party corporate support providers after July, 2022.

Information technology/software expenses

IT/software expenses include software licences such as Microsoft Office, customer relationship management (CRM) software and enterprise resource planning (ERP).

Expenses increased by 25 per cent in Q2 2023 to $231,000 compared with $185,000 in Q2 2022, primarily due to higher licence expenses related to the company's new ERP system, SAP Business One, which was implemented in H2 2022.

Taxes and licences

Taxes and licence expenses include general taxes, product branding and licence costs.

Expenses increased in Q2 2023 to $33,000 compared with $4,000 in Q2 2022, an increase of $29,000. This increase was mainly driven by the application of federal taxes on the company's financial revenues. Additionally, in Q2 2023, there were reclassifications of tax expenses that had been inaccurately categorized as costs to general and administrative expenses, aiming to align with proper accounting standards.

Share-based, equity and bonus payments (non-cash events)

These costs represent the expense associated with stock options granted to employees and directors along with equity compensation and non-cash bonuses paid to key management.

Share-based, equity and bonus payments costs in Q2 2023 decreased by $184,000 with a credit balance of $144,000 compared with $40,000 expense in Q2 2022. The decrease is a result of the reversal of the Q4 2022 equity compensation of $178,000 which has subsequently been settled with stock options issued to directors rather than share issues.

On June 30, 2023, the company held cash of $6,227,000, an increase of $4,633,000 in the same period in 2022.

Trade and other receivables increased by 35 per cent in Q2 2023, to $27,749,000 compared with $20,528,000 in Q2 2022. Trade and other payables decreased by 42 per cent in Q2 2023 to $6,912,000 compared with $11,839,000 in Q2 2022.

Q2 2023 results conference call

The company will host a conference call on Tuesday, Aug. 15, 2023, at 8 a.m. Eastern Time, to discuss Q2 2023 results and provide an update. Subscribe on-line and receive the conference details by e-mail.

Date: Tuesday, Aug. 15, 2023

Time: 8 a.m. Eastern Time

The questions can be submitted in advance.

The company's first quarter financial statements and related notes for the period ended March 31, 2023, are available to the public on SEDAR+ and the company's website.

About Verde Agritech Ltd.

Verde is an agricultural technology company that produces potash fertilizers. Its purpose is to improve the health of all people and the planet. Rooting its solutions in nature, Verde makes agriculture healthier, more productive and profitable.

We seek Safe Harbor.