Mr. Cristiano Veloso reports

VERDE ANNOUNCES Q4 AND FY 2023 RESULTS

Verde Agritech Ltd. has released its financial results for the full year ended Dec. 31, 2023 (FY 2023), and the fourth quarter 2023 (Q4 2023), as audited by Ernst & Young (EY). The FY 2023 audited results were consistent with the interim results announced by the company on Jan. 26, 2024.

"Unfortunately, as previously anticipated by the company, 2023 stood as one of the most challenging years for the agricultural and fertilizers sectors in recent history. Verde was caught in the tide of low demand and adverse pricing conditions. Looking ahead to 2024, our focus sharpens on reclaiming market share and elevating our operational and administrative efficiencies to curtail costs. Our team is hard at work to ensure that the 2023 results become an outlier within Verde's growth trajectory," declared Verde's founder, president and chief executive officer Cristiano Veloso.

Fourth quarter and full-year 2023 highlights

Operational and financial highlights:

• Verde's revenue amounted to $37.9-million in FY 2023, a 53-per-cent decrease compared with the previous year, when potash prices reached record levels. The reduction in revenue was driven by a 54-per-cent drop in average potash prices and a 32-per-cent decrease in sales volume, to 428,000 tons of Verde's multinutrient potassium products, BAKS and K Forte, sold internationally as Super Greensand (the product).
• Cash held by the company increased by $5.8-million in FY 2023. This improvement was due to new loans secured throughout 2023. The company is currently in discussions with banks to extend the maturity of its debt.
• EBITDA (earnings before interest, taxes, depreciation and amortization) before non-cash events was $2-million in FY 2023. The decline in EBITDA is primarily attributed to the lower revenues for the year and increased allowance for expected credit losses (ECLs) in 2024.
• The company reported a net loss of $6-million in FY 2023, compared with a net profit of $17.8-million in FY 2022. This shift was primarily driven by reduced revenue, alongside rises in allowance for ECLs, depreciation costs and interest expenses over the year.

Other highlights:

• The product sold in FY 2023 has the potential to capture up to 32,198 tons of carbon dioxide (CO2) from the atmosphere via enhanced rock weathering (ERW). The potential net amount of carbon captured, represented by carbon dioxide removal (CDR), is estimated at 17,680 tons of CO2. In addition to the carbon removal potential, Verde's FY 2023 sales avoided the emissions of 6,483 tons of CO2 equivalent, by substituting potassium chloride (KCl) fertilizers.
• Combining the potential carbon removal and carbon emissions avoided by the use the product since the start of production in 2018, Verde's total impact stands at 258,894 tons of CO2.
• A total of 33,920 tons of chloride have been prevented from being applied into soils FY 2023, by farmers who used the product in lieu of KCl fertilizers. A total of 146,562 tons of chloride has been prevented from being applied into soils by Verde's customers since the company started production.

2023 year in review

Agricultural market

After the historic high reached in 2022, average KCl CFR price declined by 54 per cent in 2023 compared with the average 2022 price, with a 43-per-cent decrease in Q4 2023.

The agricultural commodities market has been experiencing significant fluctuations on a downward trend since H1 2022, impacting the fertilizer market worldwide. In response to declining commodity prices in 2023, farmers postponed selling their crops hoping for a market upturn for better returns. The market's current rates for the main crops in Brazil still sit significantly below those seen in 2022.

Additionally, Brazil faced extreme climate conditions in 2023, with nine episodes of long heat waves throughout the year, reflecting the impacts of the El Nino phenomenon (above-average warming of the Equatorial Pacific Ocean waters). The lack of rainfall also led soybean farmers to postpone planting and, as a result, many opted not to plant the following crop harvest, known as the safrinha corn. According to the Brazilian National Confederation of Municipalities (CNM), economic losses from extreme weather events reached 33 billion reals in 2023.

Global market competition

In 2022, Brazil experienced its highest interest rates since 2006, a situation that has been showing signs of improvement since H2 2023 but still impacts the company's financing conditions.

The current SELIC interest rate is 10.75 per cent. The Central Bank of Brazil projects the SELIC rate to reach 9 per cent per annum by the end of 2024, and 8.5 per cent in 2025 and 2026. Annual inflation forecast for 2024 and 2025 are 3.8 per cent and 3.5 per cent, respectively.

Verde's average cost of debt is 16 per cent per annum. To incentivize sales, the company offers its customers a credit line that charges a spread to its finance cost to comprise operational costs, provisions and expected credit losses, leading to an average lending cost of 17.5 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.

Brazilian farmers have grappled with tight working capital amid challenging market conditions in 2023. This financial strain coincided with the critical time for buying necessary inputs like fertilizers for the new planting season. To navigate this, farmers have sought for input suppliers offering the most favourable payment terms and interest rates, allowing them to defer payment until after the harvest, typically between nine and 12 months later. This approach, while necessary in the agricultural sector, increases the risk of non-payment for suppliers such as fertilizer companies, reflecting the heightened financial pressures within the sector.

Currency exchange rate

The Canadian dollar devaluated by 7 per cent versus the Brazilian real in FY 2023 compared with FY 2022.

Q4 and FY 2023 results conference call

The company will host a conference call on Tuesday, April 2, 2024, at 10 a.m. Eastern Time to discuss Q4 and FY 2023 results and provide an update. Subscribe and receive the conference details by e-mail.

Date: Tuesday, April 02, 2024

Time: 10 a.m. Eastern Time

The questions must be submitted in advance up to 48 hours before the conference call.

The company's full-year and fourth quarter financial statements and related notes for the period ended Dec. 31, 2022, are available to the public on SEDAR+ and the company's website.

Results of operations

The attached table provides information about three and 12 months ended Dec. 31, 2023, as compared with the three and 12 months ended Dec. 31, 2022.

Financial and operating results

In FY 2023, revenue from sales fell by 53 per cent, accompanied by a 31-per-cent reduction in the average revenue per ton. Excluding freight expenses (FOB (free on board) price), the average revenue per ton decreased by 34 per cent in FY 2023. This decline in average revenue per ton was primarily attributed to a decrease in potassium chloride prices, the provision of additional discounts by the company to strategic customers to increase market adoption and a shift in the product mix due to farmers' limited 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 Verde elements for plants, has witnessed a reduction. BAKS, which has a higher sales price per ton compared with K Forte, accounted for 7 per cent of 2023 total sales compared with 11 per cent in 2022. The proportion of products sold in jumbo bags, which command a higher sales price per ton compared with bulk, represented 20 per cent of the company's total volume sold, down from 32 per cent in FY 2022. This shift further affected the average revenue per ton in FY 2023.

Sales declined by 32 per cent in FY 2023. These included severe climate and market conditions and working capital limitations for Brazilian farmers, due to decreased prices of agricultural commodities. Moreover, Verde's ability to provide competitive credit terms to farmers was restricted by the company's elevated debt costs relative to its larger international competitors.

Besides the reduced revenue in FY 2023, the decline in EBITDA is primarily due to an increased allowance for expected credit losses (ECLs), which raised general expenses in 2023, further affecting the company's financial position. In FY 2023, Verde recorded ECLs of $1,754, significantly impacting general expenses and, as a result, EBITDA. The company is currently in active negotiations with these clients. If the negotiations are successful, the provision will be reversed.

In addition to the lower revenue from sales, depreciation costs had an increase of $2,691 in 2023. Interest expenses increased by $3,417, due to unwinding of transaction costs that were paid to the banks to settle balances with the suppliers for the construction of plant 2 at the end of 2022. The company generated a net loss of $5,979 in FY 2023, compared with a net profit of $17,804 in FY 2022.

Basic loss per share was 11 cents for FY 2023, compared with earnings of 34 cents for FY 2022.

Production costs

In 2023, total production costs were reduced by 44 per cent, influenced by the decrease in sales volume. The average cost per ton experienced a 17-per-cent reduction in FY 2023, due to the commissioning of plant 2 in 2022. This new plant operates at a lower production cost compared with plant 1 due to enhanced operational efficiency. In 2022, plant 1 operated across four work shifts to fulfill market demand. With the inauguration of plant 2, it became possible to reduce head counts at plant 1, with both plants operating just one shift each from 2023. Sales from plant 2 constituted 68 per cent of the total sales in 2023. Moreover, the decrease in the proportion of sales made with jumbo bags to 20 per cent in 2023, down from 32 per cent in 2022, also contributed to the reduction in average production cost.

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 jumbo bags;
3. Plant 1 produces K Forte bulk, K Forte jumbo bag, 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.

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.

Sales, general and administrative expenses

SG&A represents a non-operating segment that includes corporate and administrative functions, essential for supporting the company's operating segments.

Sales expenses

Sales and marketing expenses cover salaries for employees, car rentals, domestic travel in Brazil, hotel accommodations and product promotion at marketing events. The 13-per-cent increase in expenses for FY 2023 is attributed to the appointment of new senior executives in Q3 and Q4 2023, anticipated to leverage their expertise for sales growth enhancement. Furthermore, Verde's commercial team's shift from inside sales to field sales in Q2 2023 led to additional costs on car rentals and travel.

As part of the company's marketing and sales strategy, Verde compensates its independent sales agents through commissions. Fees paid to independent sales agents decreased by 91 per cent in FY 2023, tied to the decrease in annual sales. In Q3 2023, the company reversed a provision of $249, significantly contributing to the credit balance in the year.

Product delivery freight expenses

Expenses decreased by 49 per cent in FY 2023 to $14,510 compared with $28,363 in FY 2022. The volume sold as CIF (cost insurance and freight) in 2023 represented 71 per cent of total sales, the same percentage than FY 2022. However, the company achieved a reduction in average freight costs per ton for products sold on a CIF basis, to $48 in 2023 from $64 in the comparable period of the previous year. The 25-per-cent decrease in freight costs can primarily be attributed to a reduction in the percentage of sales made to regions that are more distant from Verde's production facilities.

General and administrative expenses

General administrative expenses include general office expenses, rent, bank fees, insurance, foreign exchange variances and remuneration of executives, directors of the board and administrative staff. General administrative increased by 15 per cent in FY 2023, driven by the hiring of new executives and by costs associated with plant 2. These costs encompass salaries for administrative staff and the leasing of water trucks and metallic structures to support operations. Furthermore, the company incurred severance fees expenses due to staff reductions carried out in 2023. The increase in general administrative expenses in FY 2023 was partially offset by a 48-per-cent reduction in Q4, as no management bonuses were accrued in 2023.

In Q2 2023, the company had to record an allowance for expected credit losses in its accounts for the first time. As per Verde's sales policy, any outstanding customer payments overdue for more than 12 months must be provisioned. The total ECLs booked in Q4 2023 amounted to $1,754, compared with the absence of any provision in Q4 2022.

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

Share-based, equity and bonus payments (non-cash events) encompass expenses associated with stock options granted to employees and directors, as well as equity compensation and non-cash bonuses awarded to key management personnel. In FY 2023, the costs associated with share-based, equity and bonus payments witnessed a 31-per-cent increase. This was primarily due to an increase in share-based payment charges, attributable to the issuance of a larger number of options over the year, particularly in Q4 2023, aligning with the recruitment of senior management officers.

Income tax

Brazilian corporations are subject to income taxes (IRPJ and CSLL) using an actual profits method (that is, APM -- lucro real, in Portuguese), which is based on taxable income (the tax in this method is approximately 34 per cent of the EBITDA), adjusted by certain additions and exclusions as determined by the legislation.

Subject to certain restrictions (that is, where gross income does not exceed 78 million reals and depending on the activity), Brazilian taxpayers have the option to calculate IRPJ and CSLL using an assumed profits method (that is, PPM -- lucro presumido, in Portuguese). Under the PPM, the income is calculated on a quarterly basis on an amount equal to different percentages of gross revenue (the tax in this method is approximately 3.4 per cent of the net revenue) and adjusted as determined by the prevailing legislation.

Up to Dec. 31, 2022, the Brazilian subsidiary (Verde Fertilizantes Ltda.) was under the assumed profit method, in which is not possible to utilize prior period losses to reduce income tax.

As of January, 2023, the Brazilian subsidiary switched from assumed profits taxation to real profits taxation. With this transition, the subsidiary is allowed to offset up to 30 per cent of accumulated losses in subsequent years when profits are generated. Based on the projected taxable income, considering the approved budget and an extended period of up to 10 years the recognized deferred tax assets on the Brazilian entities are deemed recoverable, resulting in the recognition of $2,805 of deferred tax assets in such entity. The company also recognized an allowance for tax losses carry forward for the amount that is not expected to be offset against future taxable income within 10 years.

For additional details see the consolidated statements of cash flows for the quarters ended Dec. 31, 2023, and Dec. 31, 2022, in the financial statements.

On Dec. 31, 2023, the company held cash of $6,975, an increase of $5,812 on the same period in 2022. This was expected due to the additional bank loans taken out in Q4 2023.

Operating activities

In agricultural sales, credit transactions are common due to the cyclical nature of farming income, which sees fluctuations with seasonal highs during harvests and lows during planting. This cycle necessitates that farmers have access to essential inputs like seeds, fertilizers and pesticides ahead of their selling season. To accommodate this, credit terms are offered, allowing farmers to procure these inputs in advance and align their payments with their revenue cycle.

Verde's approach to credit in the agricultural sector reflects a deep understanding of these operational nuances, resulting in a substantial portfolio of receivables. The company's normal credit term is 30 to 120 days upon shipment, depending on the period of the year, tailored to the specific needs of each farmer, considering the crop cycle, creditworthiness and other key factors. This strategy ensures farmers have the necessary resources for each planting season, while Verde secures its financial interests through aligned payment schedules.

In Q4 2023, net cash generated under operating activities increased to $20,709, compared with $5,403 utilized in Q4 2022. Net cash generated under operating activities decreased to $4,619 in FY 2023, compared with $11,469 in FY 2022. This was mainly due to a decrease in receivables and payables from the last financial year.

Trade and other receivables decreased by 52 per cent in FY 2023 to $13,657, compared with $28,533 in 2022. Trade and other payables decreased by 62 per cent in FY 2023 to $4,005, compared with $10,586 in 2022.

Investing activities

Cash utilized from investing activities decreased to $4,022 in FY 2023, compared with $42,021 in 2022. This reduction is attributable to the significant infrastructure investments made in plant 2 during 2022.

Financing activities

Cash generated from financing activities decreased to $5,017 in FY 2023, compared with $30,030 in 2022. This was due to additional $4,996 bank loans secured by the company in 2023, net of loans repaid during the year.

Financial condition

The company's current assets decreased to $23,088 in Q4 2023, compared with $32,165 in Q4 2022. Current liabilities increased to $39,956 in Q4 2023, compared with $28,804 in Q4 2022; providing a working capital deficit of $16,868 in 2023, compared with the working capital surplus of $3,361 in 2022.

At the end of the financial year, the entity had three loans and borrowings agreements between Verde Fertilizantes and Banco do Brasil, which stipulated early settlement clauses in case of covenant breach if the relationship between net equity (PL)/total asset calculated in 2023 is at least 50 per cent. As of Dec. 31, 2023, Verde Fertilizantes did not meet such financial covenant, requiring the reclassification of $15,788 of the non-current liabilities to current liabilities, given, as of Dec. 31, 2023, the company did not have an unconditional right to defer its settlement for at least 12 months after that date.

On March 18, 2024, a waiver letter was issued by the bank not demanding the immediate repayment due to the breach of the financial covenant and restating that the remaining terms of the agreement remain unchanged. As a result, at date of issuance of the consolidated financial statements, such loans and borrowings are not deemed due for immediate repayment nor required to be repaid before its maturity date.

About Verde Agritech Ltd.

Verde Agritech is dedicated to advancing sustainable agriculture through the innovation of specialty multinutrient potassium fertilizers. The company's mission is to increase agricultural productivity, enhance soil health and significantly contribute to environmental sustainability. Utilizing its unique position in Brazil, the company harnesses proprietary technologies to develop solutions that not only meet the immediate needs of farmers but also address global challenges such as food security and climate change. Verde's commitment to carbon capture and the production of ecofriendly fertilizers underscores its vision for a future where agriculture contributes positively to the health of the planet.

We seek Safe Harbor.