Mr. Steve Bromley reports

ORGANTO ANNOUNCES RECORD SECOND QUARTER 2023 FINANCIAL RESULTS

Organto Foods Inc. has released financial results for the three- and six-month periods ended June 30, 2023. All amounts are expressed in Canadian dollars and in accordance with international financial reporting standards (IFRS), except where specifically noted.

Highlights

Second quarter 2023 operating highlights:

• Sales of $7,581,390, versus sales of $5,109,949 in the prior year, an increase of approximately 48 per cent and approximately 40 per cent on a currency-adjusted basis;
• Sales in the second quarter represent the largest quarterly sales in the history of Organto;
• Sales in the second quarter represent the 16th consecutive quarter of sales growth, currency adjusted, versus the same quarter in the prior year;
• Gross profit of $678,804 or 9.0 per cent of sales, versus $208,084 or 4.1 per cent of sales in the prior year. When adjusted for realized gains and losses on derivative assets and liabilities, which are derived from currency hedging directly related to product purchases, adjusted gross profit (1) was $581,669 or approximately 7.7 per cent of sales, versus 5.5 per cent in the prior year. Gross profit dollars for the quarter represents the largest second quarter gross profit in the history of Organto;
• Second quarter adjusted gross profit (1) as a percentage of sales increased 220 basis points versus the second quarter of 2022, as actions taken by the company to address significant macroeconomic challenges realized in 2022 began to contribute positively;
• Cash overhead costs for the quarter were 24.3 per cent of sales, 22.2 per cent on an adjusted basis, versus 27.1 per cent in the same quarter in the prior year. Costs include investments in infrastructure and resources employed to support growth initiatives. These costs include expenditures not related to day-to-day operations of $153,493, including retail branded product development and on-line digital transformation activities, acquisition activities, and corporate development costs.

Year-to-date 2023 operating highlights:

• Sales of $15,084,919, versus sales of $12,109,813 in the prior year, an increase of approximately 25 per cent and approximately 18 per cent on a currency-adjusted basis;
• Gross profit of $1,410,048 or 9.3 per cent of sales, versus $878,686 or 7.3 per cent of sales in the prior year. When adjusted for realized gains and losses on derivative assets and liabilities, which are from currency hedging directly related to product purchases, adjusted gross profit (1) was $1,318,296 or approximately 8.7 per cent of sales, versus 7.9 per cent in the prior year;
• Cash overhead costs for the period were 25.7 per cent of sales, 22.8 per cent on an adjusted basis, versus 22.6 per cent in the prior year. Costs include investments in infrastructure and resources employed to support growth initiatives. These costs include expenditures not related to day-to-day operations of $424,718, including retail branded product development and on-line digital transformation activities, acquisition activities, and corporate development costs.

"While we are pleased with our growth in both sales and gross profit during the quarter, and expect to realize continued growth, we are also deeply focused on improving the profitability of our business. During the second quarter, we added an experienced chief operating officer with deep industry knowledge and proven business transformation expertise to our team, and we restructured our operations to drive efficiencies and operational focus. We believe that demand for healthy, sustainable and transparent foods continues to grow, and our business is well positioned as we continue to execute on our strategic plans," commented Steve Bromley, chair and co-chief executive officer of Organto Foods, and Rients van der Wal, co-CEO of Organto Foods and CEO of Organto Europe BV.

Updated annual results outlook

Year-to-date operating results have been less than initially expected due to a combination of delays or changes in account development plans and a number of supply chain challenges. Initial projections for 2023 were for an increase in sales of approximately 135 per cent versus 2022 to approximately $50-million and an approximately 200-per-cent increase in gross profit in dollar terms. While sales and gross profit have increased, including record quarterly sales and gross profit dollars in both the first and second quarters of 2023, the company has encountered several challenges with sales growth being approximately 25 per cent to date in 2023 and growth in gross profit dollars being approximately 60 per cent so far in 2023. While growth has been slower than expected, the company expects upward sales trends to continue and believes that it will exit 2023 at sales run rates in excess of $50-million with gross profit as a percentage of sales showing improvement.

The company also expected to be EBITDA (earnings before interest, taxes, depreciation and amortization) positive during the second half of 2023. As with the delay in meeting sales targets, achieving positive EBITDA is also now expected to occur later than planned. The company expects to show continued improvement over the balance of the year and expects to realize positive EBITDA during the first half of 2024, driven by a combination of continued sales and gross profit growth combined with operational efficiencies as the benefits of streamlining and rationalization efforts are realized.

Second quarter results commentary

Sales for the three months ended June 30, 2023, were $7,581,390, as compared with $5,109,949 during the same period in the prior year, an increase of approximately 48 per cent or 40 per cent when adjusted for changes in currency rates year over year. Second quarter sales are the largest quarterly sales in the company's 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 that impacted supply. This quarter represents the company's 16th consecutive quarter of currency adjusted revenue growth versus the same quarter of the prior year.

The company realized quarterly gross profit of $678,804 or 9.0 per cent of sales in the second quarter of 2023, as compared with a gross profit of $208,084 or 4.1 per cent during the same quarter of the prior year, representing an increase in gross profit dollars of over 200 per cent. The company hedges currencies for certain product categories where both the supply and sales commitments are fixed in foreign currencies. In the second quarter, the company realized a loss on derivative liabilities from its hedging program of $97,135, which while related to product purchases, is reported separately in the financial statements. Including this loss, adjusted gross profit (1) was $581,669 or 7.7 per cent of sales, versus 5.5 per cent in the second quarter of 2022. The increase in gross profit in the second quarter of 2023 versus 2022 was due to a combination of improved market conditions in certain categories and improved internal processes.

Selling, general and administration expenses were $754,932 or 10.0 per cent of sales in the second quarter, as compared with $686,075 or 13.4 per cent of sales in the same quarter of the prior year. Included in second quarter 2023 expenses are costs associated with the company's acquisition program of $4,239 and $46,442 of costs related to the development of the company's retail branded and on-line product platforms.

Management fees in the current quarter were $230,460, as compared with $263,127 recorded in the same quarter of the prior year, and reflect reduced fees charged by certain officers.

Labour costs and benefits during the second quarter were $911,416, an increase versus the same quarter of the prior year of $847,604. Operating personnel have been added compared with the prior year, 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 the 2023 second quarter labour costs and benefits are costs associated with the company's acquisition program of $5,667 and $97,145 related to the development of its retail branded and on-line product platforms. Late in the second quarter, the company undertook a reorganization of its operating units in order to reduce labour and other costs, and improve efficiencies. Continuing labour-related costs are expected to decrease as a result of this reorganization. A provision of $176,507 for expected severance costs has been recorded in other loss in the second quarter.

As detailed above, during the second quarter of 2023, the company incurred costs of $330,000, of which $143,586 was related to the development of the company's retail branded product offering and on-line go-to-market capabilities, a provision of $176,507 for expected severance costs and $9,907 of costs associated with its acquisition program. While the benefits of these activities have yet to translate into significant bottom-line contributions, it is believed these are prudent investments for the future of the company.

Stock-based compensation in the second quarter of 2023 consists of $60,746 for restricted share units and $125,180 for stock options. Stock-based compensation for the second quarter of 2022 totalled $240,974 and consisted of $56,661 for restricted share units and $184,312 for stock options in 2019 through 2023.

Net interest and accretion expense for the second quarter of 2023 was $453,552, as compared with $559,744 for the second quarter of 2022. Interest consists of interest on 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 second quarter of 2023 was offset by $4,824 of interest income.

At the end of each quarter, the company revalues its investment securities. At June 30, 2023, the company revalued the shares of Xebra Brands that it owns and recorded an unrealized loss of $81,019 for the second quarter of 2023. The valuation acknowledges that a portion of the Xebra shares the company owns is subject to trading restrictions that expire in September, 2023. The carrying value of the Xebra shares of $38,985 at June 30, 2023, represents a discount to their market value of $39,375 to reflect these trading restrictions. In the second quarter of 2022, the company recognized an unrealized valuation loss of $370,972.

To hedge exposure to fluctuations in the U.S.-dollar-versus-euro exchange rate, The company has a hedging facility with a European financial services 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 loss on derivative assets and liabilities in the second quarter of 2023 of $97,135 (2022 -- gain of $70,467). These forward currency exchange contracts were used exclusively for product purchases and any gains or losses realized, while reported separately as realized gains or losses on derivative assets or liabilities, are designed to offset 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 June 30, 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 $73,493 for the current quarter. At the end of the second quarter in 2022, those contracts enabled the company to purchase U.S. dollars for less than by acquiring them on the spot market and an unrealized gain of $38,809 was recorded for the second quarter of 2022.

Other loss of $189,773 in the second quarter of 2023 consists primarily of a provision of $176,507 for expected severance costs resulting from the company's reorganization that was commenced during the second quarter. No such provision was recorded in 2022.

Foreign exchange gains and losses may arise from transactions incurred in currencies other than the functional currency of the company and its subsidiaries. The company reported a foreign exchange gain of $30,627 this quarter as compared with a loss of $27,489 during the same quarter last year.

The company reported a net loss of $2,251,113 during the second quarter of 2023, compared with a net loss of $2,678,625 during the same quarter in the prior year. Sales increased approximately 48 per cent or approximately 40 per cent when measured in euros, versus the second quarter of the prior year. Gross profit increased to 9.0 per cent of sales versus 4.1 per cent in the same quarter in the prior year, before the impact of currency hedging programs. Selling, general and administration, and labour costs increased as the company invested in its business to support future growth and on boarded the January, 2023, acquisition of the New Fruit Group. In addition to $73,493 and $81,109 in unrealized losses on the revaluation of derivative liabilities and investment securities and realized losses on derivative liabilities of $97,135, second quarter 2023 results include $330,000 of costs not related to day-to-day operations, including a provision for severance costs of $176,507 expected to be paid as part of an internal reorganization that commenced in the second quarter, as well as on-line platform and retail branded product development costs, and costs incurred as the company evaluated acquisition opportunities.

Year-to-date results commentary

Sales for the six months ended June 30, 2023, were $15,084,919, as compared with $12,109,813 during the same period in the prior year, an increase of approximately 25 per cent or approximately 18 per cent when adjusted for changes in currency rates year over year. 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 due to political unrest and weather-related factors that impacted supply.

The company realized gross profit of $1,410,048 or 9.3 per cent of sales in the six months ended June 30, 2023, as compared with a gross profit of $878,687 or 7.3 per cent during the same period in 2022. The company hedges currencies for certain product categories where both the supply and sales commitments are fixed in foreign currencies. In the six months ended June 30, 2023, the company realized a loss on its hedging program of $91,752, which while related to product purchases, is reported separately in its financial statements. Including this loss, adjusted gross profit (1) was $1,318,296 or 8.7 per cent of sales, versus 7.9 per cent in the same period of 2022. The improvement in gross profit is the result of actions taken to address challenges experienced in 2022, including supply chain challenges, inflation, currency fluctuations and the Russia/Ukraine war. Some of these challenges continue to affect the company's operations in 2023.

Selling, general and administration expenses were $1,568,881 or 10.4 per cent of sales in 2023, as compared with $1,407,969 or 11.6 per cent of sales in the six months ended June 30, 2022. Included in 2023 expenses are costs associated with the company's acquisition program of $46,427 and $109,229 related to the development of its retail branded and on-line product platforms. Costs increased on an absolute-dollar basis due to the addition of New Fruit Group's operations in 2023 but decreased on a percentage of sales basis.

Management fees were $480,530 in 2023, compared with $533,773 recorded in the six months ended June 30, 2022, and reflect reduced fees charged by certain officers.

Labour costs and benefits in 2023 were $1,943,709, an increase versus the $1,656,829 recorded in the six months ended June 30, 2022. Operating personnel have 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 2023 labour costs and benefits are costs associated with the company's acquisition program of $22,688 and $246,375 related to the development of its retail branded and on-line product platforms. The company has undertaken a reorganization of its operating units to reduce labour and other costs and improve efficiencies. Labour costs are expected to decrease beginning in the third quarter as a result of this reorganization. A provision of $176,507 for expected severance costs has been recorded in other loss in 2023.

As detailed above, during the six months ended June 30, 2023, the company incurred costs of $601,225, of which $355,603 were related to the development of its retail branded product offering and on-line go-to-market capabilities, a provision of $176,507 for expected severance costs and $69,115 of costs associated with its acquisition program. While the benefits of these activities have yet to translate into significant bottom-line contribution, it is believed that these are prudent investments for the future.

Stock-based compensation of $371,378 consists of $123,038 for restricted share units and $248,340 for stock options. Stock-based compensation for the six months ended June 30, 2022, totalled $456,312, and consisted of $69,969 for restricted share units and $386,343 for stock options.

Net interest and accretion expense for 2023 was $800,753, as compared with $1,148,992 for the six months ended June 30, 2022. Interest consists of interest on 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 2023 was offset by $16,834 of interest income.

At June 30, 2023, the company revalued the shares of Xebra Brands that it owns and recorded an unrealized loss of $53,556 for 2023. The valuation acknowledges that a portion of the Xebra Brands shares owned are subject to trading restrictions that expire in September, 2023. The carrying value of the Xebra Brands shares of $38,985 at June 30, 2023, represents a discount to their market value of $39,375 to reflect these trading restrictions. In the six months ended June 30, 2022, the company recognized an unrealized valuation loss of $790,569.

To hedge its exposure to fluctuations in the U.S.-dollar-versus-euro exchange rate, the company has a hedging facility with a European financial services 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 loss on derivative assets and liabilities in 2023 of $91,752 (2022 -- gain of $82,039). These forward currency exchange contracts were used exclusively for product purchases and any gains or losses realized, while reported separately as realized gains or losses on derivative assets or liabilities, are designed to offset 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 June 30, 2023, these contracts required 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 $220,107 for 2023. At June 30, 2022, those contracts enabled the company to purchase U.S. dollars for less than by acquiring them on the spot market and the company recorded an unrealized gain of $49,719 for the six months ended June 30, 2022.

Other loss of $189,773 in 2023 consists primarily of a provision of $176,507 for expected severance costs, resulting from a reorganization that was commenced late in the second quarter. No such provision was recorded in 2022.

Foreign exchange gains and losses may arise from transactions incurred in currencies other than the functional currency of the company and its subsidiaries. The company reported a foreign exchange loss of $82 in 2023 as compared with a loss of $23,412 during the six months ended June 30, 2022.

The company reported a net loss of $4,298,889 for the six months ended June 30, 2023, compared with a net loss of $5,007,412 during the same period in the prior year. Sales increased approximately 25 per cent or approximately 18 per cent when measured in euros versus the prior year. Gross profit increased to 9.3 per cent of sales, versus 7.3 per cent in 2022, before the impact of currency hedging programs. Selling, general and administration expenses, and labour costs increased as the company 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 $220,107 and $53,556 in unrealized losses on the revaluation of the company's derivative liabilities and investment securities, and $97,135 in realized losses on derivative liabilities, year-to-date results include $601,225 of costs not related to day-to-day operations, including a provision for severance costs expected to be paid as part of the company's internal reorganization that was commenced during the second quarter, as well as on-line platform and retail branded product development costs, and costs incurred as the company evaluated acquisition opportunities.

Interested parties may access the company's filings on SEDAR or at the company's website under the investors tab.

About Organto Foods Inc.

Organto is an integrated provider of branded, private-label and distributed organic and non-GMO (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.