Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our financial condition and results of operations for the six-month periods ended June 30, 2024 and 2023. Unless otherwise specified herein, references to the “Company”, “FG”, “we” or “our” shall include Forafric Global PLC (NASDAQ: AFRI) and its subsidiaries. You should read the following discussion and analysis together with our unaudited interim condensed consolidated financial statements as at June 30, 2024 and for the six-month periods ended June 30, 2024 and 2023, and the accompanying notes thereto, included elsewhere in this report. For additional information relating to our management’s discussion and analysis of the financial condition and results of operations, please see our Annual Report on Form 20-F, which includes the consolidated audited financial statements for the year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on April 30, 2024. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and in the Registration Statement, particularly in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
Key Factors Affecting Our Performance
The key factors affecting the performance of our business are described below:
Cost of Raw material. The cost of wheat is almost 90% of total cost in our business. Fluctuation on the price of the wheat has a direct impact on our performance. The cost of wheat depends on weather, supply and demand and strategies of main international producers. The cost of raw material depends also on freight cost and currency exchange rate fluctuations.
Industrial cost. The crushing cost is the second main factor affecting our performance. This cost includes equipment, labor and interest over financing. To perform on our business, we have to maintain this cost below 30 USD per ton produced. To achieve this performance, we have to monitor energy, equipment usage, logistics, human resources and financial cost.
Average selling price. The average selling price is based on the two components:
| ● | Price of flour/Semolina | |
| ● | Price of Bran |
Bran is between 20% to 25% of the production of finished products. We have no impact on the price of the bran.
On the price of finished product, we can have a limited impact due to high concurrency on the market.
Key Components of Results of Operations
Net sales, cost of sales and gross profit figures are calculated with the following method:
Net sales: Total consolidated sales;
Cost of sales: includes cost of raw materials, cost of freight, depreciation expense, cost of foreign exchange and cost of improvements used in the production; and
Gross profit: the difference between net sales and cost of goods sold.
The key components of our results of operation are:
Price of raw materials, which is affected by many factors, including global and regional supply, which in turn is impacted by factors such as weather conditions, local planting decisions, crop failure, reduced harvests, governmental policies (including both tariffs and subsidies), and other agricultural conditions, as well as local, regional, and international demand. The price of raw materials increased during the first six months of 2024 over the same period for 2023.
Cost of freight, which is impacted by shipping availability, international demand, labor shortages, strikes, regional conflicts, inadequate or obsolete port infrastructure and other factors.
Foreign exchange rates, which are continually fluctuating due to the relative economic strengths or governmental policies of different countries.
Human resources productivity, which may be impacted by the training and skills of the available workforce, the nature of tools and facilities in place, financial incentives and other factors over which we do not have any control.
Power consumption and costs, which may be affected by governmental policies, including green energy initiatives and the age and efficiency of existing and newly acquired facilities.
Our Results of Operations depends primarily on the cost of raw materials and on our industrial cost.
In our business, most raw materials are imported from Europe, South America, Black Sea and Canada (for durum). In Morocco, there is production of wheat but the quality is generally not high enough for industrial usage. The variation of the cost of raw materials has a huge impact on our business and can explain the changes in the result of operation form period to period.
Industrial cost is the second main component of our result of operation. The industrial cost includes human resources, cost of equipment, maintenance, power consumption and financial cost as main components. We launched a huge restructuring plan in 2018 to reduce our industrial cost with success. We will launch a new restructuring plan in 2025.
Results of Operations
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
The following table presents our unaudited interim condensed consolidated results of operations for the six months ended June 30, 2024 and 2023:
| Six months ended June 30, | ||||||||||||
| In thousands of USD | 2024 | 2023 | $ Change | |||||||||
| Revenues | $ | 165,238 | $ | 145,616 | $ | 19,622 | ||||||
| Cost of sales | 146,520 | 131,969 | 14,551 | |||||||||
| Gross profit | 18,718 | 13,647 | 5,071 | |||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative expenses | 22,327 | 15,024 | 7,303 | |||||||||
| Total operating expenses | 22,327 | 15,024 | 7,303 | |||||||||
| Operating loss | (3,609 | ) | (1,377 | ) | (2,232 | ) | ||||||
| Other expense (income): | ||||||||||||
| Interest income | - | (55 | ) | 55 | ||||||||
| Interest expense | 6,959 | 6,529 | 430 | |||||||||
| Change in fair value of derivatives and contingent consideration | 287 | 1,579 | (1,292 | ) | ||||||||
| Foreign exchange gain | (504 | ) | (1,500 | ) | 996 | |||||||
| Total other expense | 6,742 | 6,553 | 189 | |||||||||
| Loss before income taxes | (10,351 | ) | (7,930 | ) | (2,421 | ) | ||||||
| Income tax expense | 1,696 | 646 | 1,050 | |||||||||
| Net loss | $ | (12,047 | ) | $ | (8,576 | ) | $ | (3,471 | ) | |||
Revenues
For the six-months period ended June 30, 2024, net revenues totaled $165.2 million, increasing $19.6 million or 13.5% for the same period in 2023. The increase in revenues when compared period over period is a direct result of an increase in sales volume.
Cost of Sales
For the six-months period ended June 30, 2024, cost of sales totaled $146.5 million, increasing $14.6 million or 11.0% when compared to the same period in 2023. The increase in cost of sales when is a direct result of the increase in crushed volume.
As a result, gross profits for the six-month period ended June 30, 2024 increased by $5.1 million or 37.2% when compared to the same period in 2023.
Selling, General and Administrative Expenses
For the six-months period ended June 30, 2024, selling, general and administrative expenses totaled $22.3 million, increasing $7.3 million or 48.6% when compared to the same period in 2023. The increase in selling, general and administrative expenses is primarily attributable to impairment of $4.9 million of insurance recoveries related to reception of damaged wheat in 2022.
Other Expense (Income)
For the six-months period ended June 30, 2024, other expense totaled $6.7 million, increasing $0.2 million or 2.9% when compared to the same period in 2023.
Segments
The following table presents revenue and operating income (loss) by segment for the six-months period ended June 30, 2024 and June 30, 2023:
| Six Months Ended June 30, | ||||||||||||
| In thousands of USD | 2024 | 2023 | $ Change | |||||||||
| Sales to external customers: | ||||||||||||
| Soft wheat | $ | 122,408 | $ | 104,124 | $ | 18,284 | ||||||
| Durum wheat | 26,012 | 24,980 | 1,032 | |||||||||
| Couscous and pasta | 14,894 | 14,591 | 303 | |||||||||
| All other | 1,924 | 1,921 | 3 | |||||||||
| Total | $ | 165,238 | $ | 145,616 | $ | 19,622 | ||||||
| Direct operating income (loss): | ||||||||||||
| Soft wheat | $ | 729 | $ | 2,340 | $ | (1,611 | ) | |||||
| Durum wheat | (595 | ) | 504 | (1,099 | ) | |||||||
| Couscous and pasta | (827 | ) | (384 | ) | (443 | ) | ||||||
| All other | (2,916 | ) | (3,837 | ) | 921 | |||||||
| Operating loss | $ | (3,609 | ) | $ | (1,377 | ) | $ | (2,232 | ) | |||
For the six-months period ended June 30, 2024, net revenues of soft wheat totaled $122.4 million, increasing 17.6% from $104.1 million during the comparable period in 2023. The increase was primarily attributable to an increase in volume of sales during this period.
For the six-months period ended June 30, 2024, net sales of durum wheat totaled $26.0 million, increasing 4.1% from $25.0 million during the comparable period in 2023. The increase was primarily attributable to an increase in volume during this period.
For the six-months period ended June 30, 2024, net sales of couscous and pasta totaled $14.9 million, increasing 2.1% from $14.6 million during the comparable period in 2023.
Liquidity and Capital Resources
Working Capital and Working Capital Facilities. Working capital deficits were $141.2 million and $132.0 million at June 30, 2024 and December 31, 2023, respectively.
The Company had revolving working capital credit lines available in the amount of $53.0 million and $50.0 million as of June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024, the Company had borrowed $52.9 million and had unused availability of $0.1 million under such credit lines. As of December 31, 2023, the Company had borrowed $48.5 million and had unused availability of $1.5 million under such credit lines. The Company has also entered into credit agreements for asset-based credit facilities in order to fund wheat raw material purchases (“Wheat Credit Facilities”). The Wheat Credit Facilities provide the ability to borrow funds under consolidated lines of credit of up to approximately $135.0 million as of June 30, 2024 and $142.0 million as of December 31, 2023. The Wheat Credit Facilities are secured by inventory. The Wheat Credit Facilities must be renewed on a semi-annual basis. As of June 30, 2024, the Company had borrowed $104.6 million under the Wheat Credit Facilities, with unused availability of approximately $30.4 million. As of December 31, 2023, the Company had borrowed $126.5 million under the Wheat Credit Facilities, with unused availability of approximately $15.5 million.
As of June 30, 2024, the Company has, in addition to its obligations under the working capital credit lines and the Wheat Credit Facilities, $3.9 million in lease obligations.
Cash and Cash Equivalents - Cash and cash equivalents were $16.4 million and $24.0 million at June 30, 2024 and December 31, 2023, respectively. Cash balances are managed in accordance with our investment policy, the objectives of which are to preserve the principal value of our cash assets, maintain a high degree of liquidity and deliver competitive returns subject to prevailing market conditions.
Trade accounts receivable, net - Trade accounts receivable, net were $36.3 million and $34.7 million at June 30, 2024 and December 31, 2023, respectively.
Inventories - Inventories were $28.7 million and $28.4 million at June 30, 2024 and December 31, 2023, respectively.
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company will continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. As of January 16, 2025, the Company’s management has assessed its ability to continue as a going concern and has concluded that it is able to do so for at least the next twelve months from the date of issuance of these condensed consolidated financial statements.
Management’s assessment is based on the following considerations:
| - | Cash and Liquidity: As of December 31, 2024, the Company had cash and cash equivalents of $12.8 million, which management believes is sufficient to fund its planned operations and meet its obligations for the next twelve months. Management continues to actively manage cash flows, including monitoring receivables and payables, and has implemented cost control measures to conserve cash. | |
| - | On January 15, 2025, the Company entered into a binding agreement for the sale of a wholly owned subsidiary to a third party for total consideration of $10.0 million. The Company expects that the proceeds from this transaction will be used to fund its operations, reduce liabilities, and support its ongoing strategic initiatives. | |
| - | Management is also actively pursuing several potential sources of additional financing, including negotiations with investors and financial institutions, as well as exploring cost-reduction initiatives and the potential sale of other non-core assets, which management believes could be utilized if additional capital is needed to support operations beyond the next twelve months. |
Based on the above considerations, management believes that the Company has sufficient financial resources to meet its obligations as they come due at least the next twelve months from the date of issuance of the condensed consolidated financial statements.
Critical Accounting Policies and Estimates
As disclosed in Note 2, the significant accounting policies used in preparing the condensed consolidated financial statements were applied on a basis consistent with those reflected in our consolidated financial statements that are included in the annual report on Form 20-F for the year ended December 31, 2023 that was filed with the SEC on April 30, 2024. We believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.
Revenue Recognition – the Company follows a policy of recognizing revenue at a single point in time when it satisfies its performance obligation by transferring control over a product or service to a customer. The majority of the Company’s contracts with customers have one performance obligation and a contract duration of one year or less. The Company applies the practical expedient in Accounting Standards Codification (“ASC”) paragraph 606-10-50-14 of ASC Topic 606, Revenue from Contracts with Customers and does not disclose information about remaining performance obligations that have original expected durations of one year or less. Trade discounts or volume rebates are recognized as a deduction in revenue. No payment terms beyond one year are granted at contract inception.
Revenue related to the sale of goods and equipment is measured based on consideration specified in a contract with a customer. the Company recognizes revenue from these contracts at a point in time when it satisfies a performance obligation by transferring control of a product to a customer, generally when legal title and risks and rewards transfer to the customer. Sales terms typically provide for transfer of title at the time and point of delivery and acceptance of the product being sold.
Amounts received from customers prior to revenue recognition on a contract are recorded as contract liabilities on the condensed consolidated balance sheets.
Shipping and Handling Costs – Shipping and handling costs related to contracts with customers for the sale of goods are accounted for as a fulfillment activity and are included in cost of sales. Accordingly, amounts billed to customers for such costs are included as a component of revenues.
Taxes Collected from Customers and Remitted to Governmental Authorities – the Company does not include taxes assessed by governmental authorities that are (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers, in the measurement of transactions prices or as a component of revenues and cost of sales.
Accounts Receivable and Allowances for Credit Losses – We provide credit terms to customers in-line with industry standards, perform ongoing credit evaluations of our customers, and maintain allowances for potential credit losses based on historical experience recorded. We analyze the aging of customer accounts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment patterns when evaluating the adequacy of the allowance for credit losses. Customer balances are written off after all collection efforts are exhausted. Estimated product returns, which have not been material, are deducted from sales at the time of shipment.
Other Receivables – Other receivables include government subsidies for the production and sale of flour. The Moroccan government provides a fixed subsidy based on production and customer. Subsidies are paid by the Moroccan government twice a year based on sales of flour for the previous six months. The Company records the flour subsidies as a credit against the related costs that the subsidies were intended to offset in the same periods that the costs were incurred within the condensed consolidated statement of operations.
Income Taxes – The provision for income taxes includes income taxes currently payable in Morocco and local jurisdictions, and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. We account for uncertain tax positions using a “more-likely-than-not” threshold. A tax benefit from an uncertain tax position is recognized if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position, or the statute of limitations concerning such issues lapses.
Foreign Currency Translation and Transactions - The Company’s reporting currency is the US dollar (“USD”). The functional currency of the Company’s operating subsidiaries is generally the same as the corresponding local currency. Assets and liabilities of the operating subsidiaries are translated at the spot rate in effect at the applicable reporting date. Revenues and expenses of the operating subsidiaries are translated at the average exchange rates in effect during the applicable period. The resulting foreign currency translation adjustment is recorded as Accumulated other comprehensive loss, which is reflected as a separate component of Stockholders’ equity. The functional currency is translated into U.S. dollars for balance sheet accounts using currency exchange rates in effect as of the balance sheet date, and for revenue and expense accounts using a weighted-average exchange rate during the fiscal year. The transactions in foreign currency (that is a different currency than the functional currency of the entity) are converted at the exchange rate prevailing to the date of the transaction. The assets and liabilities denominated in foreign currencies are evaluated in the current period on the date of the closing or at the opening rate, when applicable. The translation adjustments are deferred as a separate component of equity in “Accumulated other comprehensive income”. Gains or losses resulting from transactions denominated in foreign currencies and intercompany debt that is not of a long-term investment nature are included in (Gain) loss on foreign currency exchange in the condensed consolidated statements of operations and comprehensive loss.
Foreign currency forward contracts –The Company is exposed to foreign currency exchange rate fluctuations in the normal course of its business, which the Company at times manages through the use of foreign currency forward contracts. The Company has entered into foreign currency forward contracts and accounts for these instruments in accordance with ASC Topic 815, “Derivatives and Hedging,” which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value. The Company’s foreign currency contracts are not designated as hedging instruments under ASC 815; accordingly, changes in the fair value are recorded in current period earnings.
Share-Based Compensation - Share-based awards principally comprise of stock options and cash-settled stock options, referred to as “phantom options”. Share-based awards are generally issued to certain senior management personnel. Share-based compensation cost (other than phantom options) is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period, which is the vesting period, on a straight-line basis. Our phantom options are accounted for as liability awards and are re-measured at fair value each reporting period with compensation expense being recognized over the requisite service period.
The Company uses the Black-Scholes option pricing model to determine the grant date fair value of its stock options and phantom options, respectively, as well as the fair value at each reporting period for liability classified awards. This model requires the Company to estimate the expected volatility and the expected term of the stock options, which are highly complex and subjective variables. The Company uses an expected volatility of its stock price during the expected life of the options that is based on the historical performance of the Company’s stock price as well as including an estimate using similar companies. The expected term is computed using the simplified method as the Company’s best estimate given its lack of actual exercise history. The Company has selected a risk-free rate based on the implied yield available on U.S. Treasury securities with a maturity equivalent to the expected exercise term of the stock option. The inputs to the valuation of phantom options are observable in the market, and as such are classified as Level 2 in the fair value hierarchy. The Company accounts for forfeitures of share-based awards as the occur.
Inventories - Inventories are stated at the lower of cost or net realizable value. the Company’s inventory is valued using the weighted average cost method. The costs of finished goods inventories include raw materials, labor, and overhead costs.
Property, Plant, and Equipment - Property, plant, and equipment are stated at acquisition cost, plus capitalized interest on borrowings during the actual construction period of major capital projects. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets as follows:
| Assets | Useful Lives | |
| Buildings | 39 years | |
| Machinery and equipment (technical installations) | 30-50 years | |
| Other assets | 5-30 years |
Building improvements are depreciated over the shorter of the estimated useful life of the assets or the remaining useful life. Leasehold improvements are amortized over the shorter of their useful life or remaining lease term. Expenditures for repairs and maintenance, which do not improve or extend the life of the assets, are expensed as incurred.
We perform impairment tests when circumstances indicate that the carrying value of an asset may not be recoverable. Indicators of impairment include deteriorations in operating cash flows, the anticipated sale or disposal of an asset group, and other significant changes in business conditions. Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s assessment of recoverability of property, plant and equipment is performed on a reporting unit level. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of such asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of such asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value, less estimated costs to sell.
Goodwill and Other Intangible Assets - Identifiable intangible assets with finite lives are amortized over their estimated useful lives as follows:
| Assets | Useful Lives | |
| Trademarks | Indefinite | |
| Customer relationships | 20 years | |
| Patents and licenses | 5-10 years | |
| Computer software | 5-10 years | |
| Other intangible assets | 3-10 years |
Recognized intangible assets, exclusive of goodwill, are amortized over the useful lives of the assets unless that life is determined to be indefinite. All of our intangible assets, exclusive of goodwill, are finite lived. All amortization expense related to intangible assets is recorded in selling, general, and administrative expense in the condensed consolidated statements of operations. Intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted future cash flows.
Goodwill and other indefinite-lived intangible assets are evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our annual impairment evaluation is conducted during our fiscal fourth quarter.
In accordance with the accounting standards, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill or an indefinite-lived intangible asset is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value.
The quantitative impairment test for goodwill compares the fair value of a reporting unit with the carrying value of its net assets, including goodwill. If the fair value of the reporting unit is less than the carrying value of the reporting unit, an impairment charge would be recorded to the Company’s operations, for the amount in which the carrying amount exceeds the reporting unit’s fair value. We determine fair values for each reporting unit using the market approach, when available and appropriate, the income approach, or a combination of both. The income approach involves forecasting projected financial information (such as revenue growth rates, profit margins, tax rates, and capital expenditures) and selecting a discount rate that reflects the risk inherent in estimated future cash flows. Under the market approach, the fair value is based on observed market data. If multiple valuation methodologies are used, the results are weighted appropriately.
Recent Accounting Pronouncements
Other than as described below, no new accounting pronouncement issued or effective during the six months ended June 30, 2024 has had or is expected to have a material impact on the condensed consolidated financial statements.
In November 2023, the FASB issued ASU No 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 mainly requires more enhanced information about a reportable segment’s expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company is still evaluating the impact of this ASU on its condensed consolidated financial statements and related disclosures and will adopt it for the year ended December 31, 2024.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which enhances the transparency and decision usefulness of income tax disclosures by requiring; (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. For public business entities, the standard is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The Company is determining the impact of the ASU 2023-09 on its consolidated financial statements.
