Above Food Ingredients Inc.

Above Food Ingredients Inc. (New Above Food or the Company) operates as an Alberta-based innovative food company that leverages a vertically integrated supply chain to deliver differentiated ingredients and consumer products, with a vision to create a healthier world through chain of custody plant proteins, traceability, quantifiable sustainability, and nutrient density ¹. The Company's business model is centered on two reportable segments: Disruptive Agriculture and Rudimentary Ingredients, and Consumer Packaged Goods (CPG) ². The Disruptive Agriculture and Rudimentary Ingredients segment focuses on discrete genetics, origination, purchasing, grading, primary processing, and sale of regeneratively grown grain, along with the origination, purchase, and sale of bespoke ingredient products processed through Company-owned facilities ³. The CPG segment is responsible for formulating, manufacturing, selling, distributing, and marketing proprietary consumer product formulations under owned brands, and also manufactures and distributes for private-labeled retail owned brands ⁴. The Company's revenue generation is primarily from commodity contracts related to forward sales of commodities like grain and pulses, rudimentary ingredients, subleasing of farmlands, and the sale of other products through consumer-packaged goods ⁵. A significant portion of the Disruptive Agriculture and Rudimentary Ingredients revenue is contracted over 3 to 12 months with customers ⁶.

For the fiscal year ended January 31, 2024 (FY24), the Company reported total revenue of $368,423,398 ⁷, a decrease of 7.1% from $396,464,504 in the fiscal year ended January 31, 2023 (FY23) ⁸. Cost of sales for FY24 was $374,322,146 ⁹, resulting in a gross loss of $5,898,748 ¹⁰. Operating loss for FY24 was $42,099,461 ¹¹, and the net loss for the year was $53,312,282 ¹². Diluted EPS for FY24 was $(0.69) ¹³. As of January 31, 2024, cash and cash equivalents stood at $952,280 ¹⁴, and the Company had an accumulated deficit of $103,880,258 ¹⁵. Total liabilities were $190,146,187 ¹⁶.

Comparing FY24 to FY23, revenue decreased by $28.0 million ¹⁷, primarily due to working capital constraints that limited growth in the disruptive agriculture and rudimentary ingredients segment, as well as price decreases in durum and other high-volume commodities ¹⁸. Disruptive Agriculture and Rudimentary Ingredients revenues decreased to $356.4 million in FY24 from $387.0 million in FY23 ¹⁹. CPG revenues, however, increased to $11.6 million in FY24 from $9.4 million in FY23 ²⁰, largely attributed to acquisitions that closed in May and June 2022 being included for the full FY24 period ²¹. The gross loss increased by $4.6 million, or 361.0%, in FY24 compared to FY23, mainly due to inventory impairment and write-offs ²². Selling, general, and administrative (SG&A) expenses increased by $3.1 million, or 10.0%, in FY24, driven by higher professional fees related to the business combination and go-public process, and increased rent expenses, partially offset by decreased stock option expenses ²³. Interest expense increased by $2.3 million to $7.7 million in FY24, due to new credit facilities and rising interest rates ²⁴. The equity method investment loss increased by $3.0 million to $3.8 million in FY24, primarily due to a $3.3 million impairment of the investment in ANF ²⁵.

During FY24, the Company completed the acquisition of Discovery Seed Labs Ltd. (DSL) on March 23, 2023, for $3,213,563, paid with $2 million cash and 502,088 class A common shares valued at $1,213,563 ²⁶. This acquisition was considered a business combination and accounted for using the acquisition method ²⁷. The Company also incurred approximately $3 million in inventory write-offs and write-downs, including a $2.7 million write-off of oat inventory due to discontinuance of the oat grower program and a $285,000 write-down of CPG inventory ²⁸. Significant contract washout and cancellation costs, totaling approximately $650K, were incurred to exit unfavorable contracts ²⁹.

Above Food's growth strategy is centered on organic or internal growth, aiming for profitable and sustainable revenue growth through the sale of existing higher-margin products, expansion into new channels and customer acquisition, introduction of higher-margin products, building strategic partnerships, and continuous improvement in plants and organization to enhance efficiencies and simplify the business ³⁰. The Company also plans for growth through acquisitions and securing long-term contracts ³¹. A significant percentage of the Disruptive Agriculture and Rudimentary Ingredients revenue is contracted over 3 to 12 months with customers, which management believes will contribute to stable revenues over time, although fluctuations have been experienced ³².

The Company intends to expand its existing credit facility to accommodate business growth and provide additional liquidity ³³. This expansion is partly dependent on additional financing, including in connection with the Business Combination ³⁴. If the credit facility expansion is unsuccessful, the Company may be forced to reduce operations and idle certain assets ³⁵. Above is also exploring alternative asset-based lenders to increase available working capital and is currently in negotiations with lenders ³⁶. Should these plans not be successful, Above would liquidate inventory as necessary, pay down the outstanding balance of the asset-backed lending line, and then utilize the line once working capital allows ³⁷.

The Company expects to incur additional annual expenses related to being a publicly listed company, including directors' and officers' liability insurance, director fees, SEC reporting requirements, transfer agent fees, and increased auditing and legal fees ³⁸. Management believes that the proceeds from the Business Combination, along with current available funds, will provide sufficient liquidity to fully fund future operations and any potential planned expansion of the business for at least the next twelve months ³⁹. The Company may issue debt and/or equity securities on an opportunistic basis, dependent on market conditions and available pricing ⁴⁰.

The Company faces several material risks, including recurring losses from operations, a working capital deficiency of $85,414,272 as of January 31, 2024 ⁴¹, and violations of restrictive covenants related to approximately $66 million of its aggregate borrowings as of January 31, 2024 ⁴². There is no assurance that the Company will successfully obtain further equity and debt financing or maintain the support of current lenders, particularly concerning the indebtedness in default ⁴³. The Company also expects to continue incurring recurring losses as it grows and has significant costs related to the business combination with Bite ⁴⁴. Supply chain challenges, including higher raw material, freight, and logistics costs, and ingredient shortages, have persisted and are expected to continue in the 2025 fiscal year ⁴⁵. Climate change poses long-term challenges, including physical risks from intense weather events, droughts, and changes in temperature and precipitation, which can impact operations, customers, and the supply chain ⁴⁶. Evolving carbon regulations and global decarbonization ambitions could increase costs ⁴⁷. The impact of climate changes on customer operations is uncertain and may be negative, and logistics bottlenecks due to adverse weather or poor highway conditions could delay product delivery ⁴⁸. The Company's derivative contracts are not designated as accounting hedges, meaning changes in their fair value immediately affect earnings ⁴⁹. A 5% increase in the U.S. Dollar exchange rate would have decreased net loss by $0.1 million for FY24 and $2.2 million for FY23 ⁵⁰. A 10% increase in the price of various commodities traded would have increased net loss by $1.2 million for FY24 and $0.7 million for FY23 ⁵¹. A 1% increase in interest rates would increase interest expense by approximately $1.0 million for FY24 and $1.7 million for FY23 ⁵².

Management's message to shareholders emphasizes a commitment to growth, both organically and through acquisitions, while navigating the complexities of becoming a public company. The Company's vision is to create a healthier world by leveraging its vertically integrated supply chain to deliver differentiated ingredients and consumer products, with a priority on chain of custody plant proteins, traceability, quantifiable sustainability, and nutrient density ⁵³. Management explicitly states that the proceeds from the Business Combination, together with current available funds, are believed to provide sufficient liquidity to fully fund future operations and any potential planned expansion of the business for at least the next twelve months ⁵⁴. Key strategic priorities include delivering profitable and sustainable revenue growth through existing higher-margin products, expanding into new channels and attracting new customers, introducing higher-margin products, building strategic partnerships, and investing in continuous improvement to enhance efficiencies and simplify the business ⁵⁵. Additionally, growth through acquisitions and securing long-term contracts are highlighted as critical components of the growth strategy ⁵⁶. Management also acknowledges the need to expand its existing credit facility to accommodate business growth and provide additional liquidity, noting that this is dependent on additional financing being raised ⁵⁷.