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 generating revenue through two reportable segments: Disruptive Agriculture and Rudimentary Ingredients, and Consumer Packaged Goods (CPG) ². The Disruptive Agriculture and Rudimentary Ingredients segment focuses on the provisioning of discrete genetics, origination, purchasing, grading, primary processing, and sale of regeneratively grown grain, as well as the origination, purchase, and sale of bespoke ingredients products, processed primarily through Company-owned ingredient facilities ³. The CPG segment formulates, manufactures, sells, distributes, and markets proprietary consumer product formulations in owned brands and also focuses on manufacturing and distribution for private-labeled retail owned brands ⁴. A significant percentage of the Disruptive Agriculture and Rudimentary Ingredients revenue is contracted over 3 to 12 months with customers, with terms allowing for cancellation upon events of force majeure ⁵.

For the fiscal year ended January 31, 2024 (FY24), the Company reported total revenue of $368,423,398 ⁶, a decrease of 7.1% from $396,464,504 in the fiscal year ended January 31, 2023 (FY23) ⁷. Cost of sales for FY24 was $374,322,146 ⁸, resulting in a gross loss of $5,898,748 ⁹, which represents a 361.0% increase in gross loss compared to the $1,279,640 gross loss in FY23 ¹⁰. Operating loss for FY24 was $42,099,461 ¹¹, an increase of 6.1% from $39,683,831 in FY23 ¹². The net loss for FY24 was $53,312,282 ¹³, an increase of 17.2% from the $45,484,530 net loss in FY23 ¹⁴. Diluted EPS for FY24 was $(0.69) ¹⁵, compared to $(0.60) in FY23 ¹⁶. As of January 31, 2024, cash and cash equivalents stood at $952,280 ¹⁷, and the Company had a working capital deficiency of $85,414,272 ¹⁸. Total liabilities were $190,146,187 ¹⁹, with long-term debt (including current portion) of $30,969,307 ²⁰.

Revenue for the Disruptive Agriculture and Rudimentary Ingredients segment decreased to $356,400,000 in FY24 from $387,000,000 in FY23 ²¹. This decrease was primarily attributed to working capital constraints that capped growth, as well as price decreases in durum, peas, wheat, canary seed, and canola, which offset a significant increase in durum volumes ²². The average price of durum in FY24 was $482.92 per metric ton, compared to $529.98 for FY23 ²³. Conversely, CPG revenues increased to $11,600,000 in FY24 from $9,400,000 in FY23 ²⁴, largely due to acquisitions that closed in May and June 2022 being included for the full FY24, compared to partial inclusion in FY23 ²⁵. The gross loss increased in FY24 due to inventory impairment and write-offs of approximately $3.0 million, including a $2.7 million write-off of oat inventory due to the discontinuance of the oat grower program and a $285,000 write-down of CPG inventory ²⁶. Selling, general, and administrative (SG&A) expenses increased by $3.1 million, or 10.0%, to $34,222,524 in FY24 from $31,107,404 in FY23 ²⁷, driven by increased professional fees of $3.5 million related to the go-public process and increased rent of $1.4 million due to operating leases and consolidation of acquired operations ²⁸. Interest expense increased by $2.3 million to $7,670,156 in FY24 from $5,378,560 in FY23 ²⁹, primarily due to new credit facilities and increased interest rates on variable rate facilities ³⁰. The equity method investment loss increased by $3.0 million to $3,787,927 in FY24 from $812,669 in FY23 ³¹, mainly due to a $3.3 million impairment of the investment in ANF ³².

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 ³³. This acquisition added a seed testing and genomics laboratory to the Company's operations ³⁴. In June 2024, the Company acquired the remaining 66.94% interest in ANF for 1,604,253 New Above Food Common Shares, making ANF a wholly owned subsidiary ³⁵. The Company also entered into an asset purchase agreement on May 14, 2024, with Arcadia Biosciences, Inc. and Arcadia Wellness, LLC, to purchase assets including inventory and intellectual property, in exchange for a $6,000,000 USD promissory note ³⁶. Additionally, on June 13, 2024, Above issued 2,377,082 common shares for cash proceeds of $5 million USD to Grupo Empresarial Enhol, S.L., and concurrently issued 6,180,413 common shares to Enhol as consideration for 100% of Brotalia, S.L. ³⁷.

A key component of Above Food's growth strategy is organic or internal growth, aiming for profitable and sustainable revenue growth through the sale of existing higher margin products, expansion into new channels, attracting new customers, introducing higher margin products, building strategic partnerships, and investing in continuous improvement in plants and organization to improve efficiencies and simplify the business ³⁸. The Company also plans for growth through acquisitions and securing long-term contracts ³⁹. A significant percentage of the Disruptive Agriculture and Rudimentary Ingredients revenue is contracted over 3 to 12 months with customers, which management believes will result in stable revenues over time, despite experienced fluctuations ⁴⁰.

The Company expects to reduce its relative Research & Development (R&D) cost significantly in the near term as it works to commercialize existing intellectual property ⁴¹. Management believes the refinement of current operations and intellectual property is crucial to long-term growth and strategy ⁴².

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, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees, and similar expenses ⁴³. Management believes that the proceeds from the Business Combination, together with current available funds, will provide sufficient liquidity to fully fund future operations and any potential planned expansion of the business ⁴⁴. The Company also intends to expand its existing credit facility to accommodate business growth and provide additional liquidity, which is dependent on additional financing being raised ⁴⁵. If unsuccessful in expanding the credit facility, the Company may be forced to reduce operations and idle certain assets ⁴⁶.

The Company has identified and begun to realize a number of synergies from acquired operations, resulting from restructuring of management teams, sharing resources, brand consolidation, and leveraging its robust supply chain in product formulations ⁴⁷. The Company expects supply chain challenges, including higher raw material costs, higher freight and logistics costs, and disruptions from labor shortages and ingredient availability, to continue in the 2025 fiscal year ⁴⁸. Management believes that instituted price increases and additional cost savings initiatives will enable continued investment in growth projects ⁴⁹.

The Company plans to continue to be active in R&D as it invests in growing intellectual property, product offerings, and expanding market reach ⁵⁰. Planned capital allocation includes R&D spending, though a reduction in relative R&D cost is expected in the near term as existing intellectual property is commercialized ⁵¹. The Company's main sources of liquidity are its operations, equity issuances, and debt issuances, with funds primarily used to finance working capital and capital expenditure requirements ⁵². The Company believes these sources will be sufficient to finance continued operations, growth strategy, and additional expenses for at least the next twelve months ⁵³. The Company may issue debt and/or equity securities on an opportunistic basis, dependent upon market conditions and available pricing ⁵⁴.

The Company faces several material risks, including recurring losses from operations, a working capital deficiency of $85,414,272 as of January 31, 2024 ⁵⁵, and violations of restrictive covenants related to approximately $66 million of its aggregate borrowings as of January 31, 2024 ⁵⁶. There is no assurance that the Company will be successful in obtaining further equity and debt financing or maintaining the support of current lenders, particularly concerning indebtedness in default ⁵⁷. The Company also expects to incur recurring losses as it grows and has incurred significant costs in preparation for its public transaction ⁵⁸. Climate change presents long-term challenges, including increasing expectations for climate actions and reductions of GHG emissions, and physical risks such as more intense weather events, longer droughts, rising sea levels, and changes in temperature and precipitation patterns, which can impact operations, customers, and the supply chain ⁵⁹. Global decarbonization ambitions and energy transition are driving carbon regulations and informing investor capital allocation priorities, exposing Above Food to evolving risks related to potential regulatory changes, including carbon pricing ⁶⁰. The impact of climate changes on customer operations is uncertain and may be negative, and climate change laws could increase costs and impact financial condition ⁶¹. Logistics bottlenecks from poor highway conditions or adverse weather may delay product delivery and impact financial results ⁶². The Company is exposed to currency risk from US dollar denominated sales and expenses, and commodity price risk due to volatility in agricultural commodity prices, which can affect comprehensive income and operating cash flows if not properly managed ⁶³. A 1% increase in interest rates would increase interest expense for FY24 by approximately $1.0 million ⁶⁴.

Management's message to shareholders emphasizes a growth strategy focused on organic or internal growth, aiming to deliver profitable and sustainable revenue growth through the sale of existing higher margin products, expanding into new channels, attracting new customers, introducing higher margin products, building strategic partnerships through consumer and customer insights, and investing in continuous improvement in plants and organization to improve efficiencies and simplify the business ⁶⁵. Management also highlights growth through acquisitions and securing long-term contracts as strategic priorities ⁶⁶. The Company expects to incur additional annual expenses related to being a publicly listed company ⁶⁷. Management believes that the proceeds from the Business Combination, together with current available funds, will provide sufficient liquidity to fully fund future operations and any potential planned expansion of the business ⁶⁸. The Company intends to expand its existing credit facility to accommodate business growth and provide additional liquidity ⁶⁹. Management also explicitly states the intention to reduce relative R&D cost significantly in the near term as the Company works to commercialize existing intellectual property, recognizing the value in continuing as a leader in regenerative agriculture and the crucial role of current operations and intellectual property refinement for long-term growth and strategy ⁷⁰.