Mr. Steve Bromley reports

ORGANTO ANNOUNCES RECORD FIRST QUARTER 2023 FINANCIAL RESULTS

Organto Foods Inc. has released financial results for the quarter ended March 31, 2023. All amounts are in accordance with international financial reporting standards (IFRS) except where specifically noted.

Highlights

First quarter 2023 operating highlights:

• Sales of $7,503,529 versus sales of $6,999,864 in the prior year, an increase of approximately 7.2 per cent and approximately 4 per cent on a currency adjusted basis:
  • Sales in the first quarter represent the largest quarterly sales in the history of Organto;
  • Sales in the first quarter represent the 15th consecutive quarter of record sales growth, currency adjusted, versus the same quarter in the prior year;
  • Sales at the top end of previously provided first quarter sales guidance of $7.4-million to $7.5-million;
• Gross profit of $731,244 or 9.7 per cent of sales versus $670,602 or 9.6 per cent of sales in the prior year; when adjusted for the realized gain on derivative assets and liabilities, which is from currency hedging directly related to product purchases, adjusted gross profit was $736,627 or approximately 9.8 per cent of sales versus 9.7 per cent in the prior year:
  • Gross profit for the quarter represents the largest quarterly gross profit in the history of Organto;
  • First quarter adjusted gross profit as a percentage of sales increased 380 basis points versus the fourth quarter of 2022 as actions taken by the company to address significant macroeconomic challenges realized in 2022 began to contribute positively;
  • Adjusted gross profit for the first quarter of 9.8 per cent exceeded previously provided quarterly gross profit guidance of 9.4 per cent to 9.6 per cent;
• Cash overhead costs for the quarter were 27.1 per cent of sales, 23.5 per cent on an adjusted basis, versus 25.7 per cent in the prior year; costs include investments in infrastructure and resources required to support growth initiatives; these costs include expenditures not related to day-to-day operations of $271,226, including retail branded product development and on-line digital transformation activities, acquisition activities, and corporate development costs.

Balance sheet highlights as of March 31, 2023:

• Cash of $2,159,885 including $113,902 of restricted cash related to currency hedging facilities;
• Working capital of $1,080,060;
• Non-current liabilities of $9,035,126.

"We are pleased with our progress in the first quarter as we have realized the largest quarterly sales in our history and, most importantly, started to realize the benefits of initiatives we continue to implement to improve our gross profit profile following the macroeconomic challenges we faced in 2022. We continue to implement initiatives to profitably build our business, and we believe we have good momentum as we exit the first quarter. We believe that demand from healthy, sustainable and transparent foods continues to grow, and we are looking forward to continued growth in our business as we execute on our strategic plans. The integration of the New Fruit Group acquisition has been a key focus for us, and we are pleased with our progress so far. We remain confident that this acquisition will help us achieve our long-term growth objectives and enhance our business profile," commented Steve Bromley, chair and co-chief executive officer of Organto, and Rients van der Wal, co-CEO of Organto and CEO of Organto Europe BV.

Detailed operating results commentary

Sales for the three months ended March 31, 2023, were $7,503,529 as compared with $6,999,864 during the same period in the prior year, an increase of approximately 7.2 per cent, and approximately 4 per cent when adjusted for changes in currency rates year over year. First quarter sales are the largest quarterly sales in its history. These results were driven by the acquisition of the New Fruit Group early in the year and offset somewhat by challenges in certain core categories in the quarter due to political unrest and weather-related factors, which impacted supply. This quarter is its 15th consecutive quarter of currency adjusted revenue growth versus the same quarter in the prior year.

It realized a quarterly gross profit of $731,244 or approximately 9.7 per cent of sales in the first quarter of 2023 as compared with a gross profit of $670,602 and 9.6 per cent during the same quarter in the prior year. It hedges currencies for certain product categories where both the supply and sales commitments are fixed in foreign currencies. In the first quarter, it realized a gain on derivative assets and liabilities from its hedging program of $5,383, which, while related to product purchases, is reported separately. Including this gain, adjusted gross profit was $736,627 or approximately 9.8 per cent of sales versus 9.7 per cent in the first quarter of 2022 and 6.0 per cent in the fourth quarter of 2022. The improvement in adjusted gross profit in the first quarter versus the second, third and fourth quarters of 2022 is the result of actions it has implemented to address macroeconomic factors experienced in 2022, including supply chain challenges, a rapid increase in inflation, currency fluctuations and the Russia/Ukraine war.

Selling, general and administration expenses were $813,949 or 10.8 per cent of sales this quarter as compared with $721,894 or 10.3 per cent of sales in the same quarter in the prior year. Included in 2023 are costs associated with its acquisition program of $42,187 and $62,787 related to the development of its retail branded and on-line product platforms.

Management fees in the current quarter were $250,070 compared with the $270,646 recorded in the same quarter of the prior year and reflect reduced fees charged by certain officers. These reduced fees will remain until operating economics improve.

Labour costs and benefits during the first quarter were $1,032,293, a significant increase versus the same quarter of the prior year, but within expectations. Operating personnel has been added, not only from the acquisition of New Fruit Group, but also to support increased commercial activities and to develop new products and sales opportunities. Included in first quarter 2023, labour costs and benefits are costs associated with its acquisition program of $17,021 and $149,230 for costs related to the development of its retail branded and on-line product platforms.

As detailed above, during the first quarter of 2023, it incurred costs of $212,017, of which $119,537 was related to the development of its retail branded product offering and on-line go-to-market capabilities and $59,208 of costs associated with its acquisition program. While the benefits of these activities have yet to translate into significant bottom line contributions, it believes these are prudent investments for the future of the company.

It recognized $185,452 in stock-based compensation in the first quarter of 2023, which consists of $62,292 for restricted share units and $123,161 for stock options. Stock-based compensation for the first quarter of 2022 totalled $215,338 and consisted of $13,307 for restricted share units and $208,541 for stock options.

Net interest and accretion expense for the first quarter of 2023 was $347,201 as compared with $589,248 for the prior year. Interest consists of interest on its convertible debentures and accounts receivable factoring costs. Accretion in 2023 consists of accretion on the convertible debentures and the New Fruit Group earnout liability while 2022 also included accretion on the earnout payments accrued in relation to the Fresh Organic Choice and Beeorganic acquisitions. Interest expense in the first quarter of 2023 was offset by $12,009 of interest income.

At March 31, 2023, it revalued the shares of Xebra Brands Ltd. that it owns and recorded an unrealized gain of $27,463 for the first quarter of 2023. The valuation acknowledges that a portion of the Xebra shares it owns are subject to trading restrictions, which expire in September, 2023. The carrying value of the Xebra shares of $120,004 at March 31, 2023, represents a discount to their market value of $121,407 to reflect these trading restrictions. In the first quarter of 2022, it recognized an unrealized valuation loss of $419,597.

To hedge its exposure to fluctuations in the U.S.-dollar-versus-euro exchange rate, it maintains a hedging facility with a European financial service company for forward currency exchange contracts. The difference between the cost to acquire U.S. dollars through the forward currency exchange contracts and the spot market at the time of purchase has been recorded as a realized gain on derivative assets and liabilities in the first quarter of 2023 of $5,383 (2022: $11,572). These forward currency exchange contracts were used exclusively for product purchases and the gains, realized while reported separately as realized gains on derivative assets, are designed to offset the reported cost of sales.

The carrying value of the derivative assets and liabilities represents the difference between the cost to acquire U.S. dollars on the spot market and through the forward currency exchange contracts. At March 31, 2023, these contracts require the company to purchase U.S. dollars for more than by acquiring them on the spot market, resulting in the recognition of a derivative liability and an unrealized loss of $146,614 for the current quarter. At the end of the first quarter in 2022, these contracts enabled it to purchase U.S. dollars for less than by acquiring them on the spot market and were recorded as an unrealized gain of $10,910 for the first quarter.

Foreign exchange gains and losses may arise from transactions incurred in currencies other than the functional currency of the company and its subsidiaries. It reported a foreign exchange loss of $30,709 this quarter as compared with a gain of $4,077 during the same quarter last year. A portion of its cash balance is held in euros and U.S. dollars, some of its accounts payable are denominated in currencies other than the currency used to pay these accounts, and fluctuations in the exchange rates of these currencies will result in gains or losses.

It reported a net loss of $2,047,776 during the first quarter of 2023, compared with a net loss of $2,328,787 during the same period in the prior year. Sales increased 7.2 per cent, or approximately 4 per cent, when measured in euros, versus the first quarter in the prior year. Gross profit increased to 9.7 per cent of sales versus 9.6 per cent in the same quarter in the prior year and 4.0 per cent in the fourth quarter of 2022, before the impact of its currency hedging programs. Costs increased as it invested in its business, expanded its work force and built out its internal infrastructure to accommodate expected growth in its business in 2023 and beyond. In addition to $146,614 in unrealized losses on the revaluation of its derivative assets and liabilities, first quarter 2023 results include $271,226 of costs not related to day-to-day operations including on-line platform and retail branded product development costs and costs incurred as it evaluated acquisition opportunities.

About Organto Foods Inc.

Organto is an integrated provider of branded, private label and distributed organic and non-genetically modified organism fruit and vegetable products using a strategic asset-light business model to serve a growing socially responsible and health-conscious consumer around the globe. Organto's business model is rooted in its commitment to sustainable business practices focused on environmental responsibility and a commitment to the communities where it operates, its people and its shareholders.

We seek Safe Harbor.