Business Context and Reporting Period
Forafric Global PLC filed Form 8-K reporting the June 9, 2022 closing of its business combination with Forafric Agro Holdings Limited (FAHL), formerly conducted through Globis Acquisition Corp. The transaction converted the former SPAC into an operating food-processing company focused on soft wheat, durum wheat, couscous and pasta, primarily in Morocco.
FAHL became a wholly owned subsidiary of Forafric Global PLC. The company began trading on Nasdaq on June 10, 2022 under “AFRI” for ordinary shares and “AFRIW” for warrants. The filing includes unaudited FAHL financial statements for the three months ended March 31, 2022 and 2021, together with pro forma combined information.
Financial and Operating Metrics
| Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | Change |
|---|---|---|---|
| Revenue | $89.1 million | $60.6 million | +$28.4 million; +46.9% |
| Cost of sales | $79.6 million | $49.7 million | +$29.8 million; +60.0% |
| Gross profit | $9.5 million | $10.9 million | -$1.4 million; -12.6% |
| Gross margin | Approximately 10.7% | Approximately 18.0% | Down approximately 7.3 percentage points |
| SG&A | $8.9 million | $6.0 million | +$2.9 million; +48.3% |
| Operating income | $0.6 million | $4.9 million | -$4.3 million |
| Operating margin | Approximately 0.7% | Approximately 8.0% | Down approximately 7.3 percentage points |
| Net income (loss) | $(3.5) million | $2.4 million | -$5.9 million |
| Net margin | Approximately (3.9)% | Approximately 4.0% | Down approximately 7.9 percentage points |
Segment revenue was $62.6 million from soft wheat, $16.4 million from durum wheat and $10.1 million from couscous and pasta. Direct operating income was $1.6 million, $(0.3) million and $(0.8) million, respectively, for those segments.
Interest expense was $2.6 million, foreign-exchange loss was $0.5 million and income tax expense was $1.0 million. The filing does not provide a clear cash-flow statement or operating cash-flow amount in the supplied text.
Cash and cash equivalents were $21.1 million at March 31, 2022, compared with $14.4 million at December 31, 2021. Trade receivables were $38.9 million and inventories were $24.2 million at March 31, 2022.
Working capital deficit was $78.2 million at March 31, 2022, compared with $85.3 million at December 31, 2021. Revolving working-capital facilities totaled $60.0 million, of which $59.5 million was borrowed, leaving $0.5 million available. Wheat credit facilities totaled approximately $105.0 million, of which $81.3 million was borrowed, leaving approximately $23.7 million available. Lease obligations were $6.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially, driven primarily by higher sales and market share in Morocco, as well as higher selling prices.
- Cost of sales grew faster than revenue because of higher wheat commodity prices, increased purchased volumes, freight costs and foreign-currency effects.
- Gross profit and margins declined despite revenue growth.
- SG&A increased due to higher personnel costs and merger-related expenditures.
- Higher debt levels contributed to a $1.0 million increase in interest expense.
- Soft wheat remained profitable, while durum wheat and couscous and pasta shifted to direct operating losses.
Transaction, Capitalization and Unusual Items
- Globis stockholders redeemed 9,612,536 shares for approximately $99 million, or $10.30 per share, from the SPAC trust account.
- A PIPE investor purchased 1,320,195 ordinary shares at $10.50 per share for gross proceeds of approximately $13.9 million.
- FAHL convertible bonds with aggregate principal of $11.5 million converted into 1,248,426 ordinary shares at $9.45 per share, including 977,659 shares issued for bonds subscribed by sponsor affiliates.
- Approximately $15.1 million of interest-free related-party loans was converted into 1,445,164 ordinary shares at $10.50 per share and the loans were terminated.
- Immediately after closing, approximately 26.5 million ordinary shares and 15.8 million warrants were outstanding.
- The Seller is entitled to receive $20.0 million plus accrued interest at 8% per annum, payable on the first anniversary of closing. Amounts unpaid after the due date bear additional interest at 12% per annum, subject to applicable law.
- Forafric Maroc entered into a framework agreement to extend three mills and construct three new mills, targeting an additional daily wheat and durum processing capacity of 2,370 metric tons within 30 months. Existing capacity was stated as 2,420 metric tons per day.
- UHY LLP replaced Marcum LLP as the company’s independent registered public accounting firm. The filing reports no disagreements or reportable events involving Marcum.
Guidance, Outlook, Management Commentary and Risks
The company did not provide quantified revenue, earnings or cash-flow guidance in the supplied filing. Management stated that it expects to offset anticipated raw-material and logistics cost increases through pricing actions in certain markets and Moroccan government subsidies. Management also stated that it had diversified wheat sourcing and expected adequate raw-material supply for calendar 2022.
Wheat represents nearly 90% of total cost. Key performance sensitivities include wheat prices, freight, foreign exchange, energy, labor, equipment utilization, financing costs and the selling prices of flour, semolina and bran. Management targets industrial costs below $30 per ton produced and stated that restructuring efforts reduced industrial costs by 40% over the preceding three years.
Management reported no material COVID-19 impact on sales and no significant logistics disruption to date, but identified potential supply-chain and shipping risks. The Russia-Ukraine war could reduce global wheat availability and increase raw-material prices, although the company stated that it did not purchase wheat from Russia or Ukraine in 2022.
Other risks include intense competition, regulatory changes, foreign-exchange volatility, commodity-price inflation, execution of the mill expansion, dependence on Moroccan subsidies, maintaining Nasdaq listing, securities-price volatility, merger-related costs, potential legal proceedings and failure to realize expected transaction benefits. The filing states that no known litigation was expected to have a material effect on the financial statements.
Important Facts for Investors to Verify
- Review the March 31, 2022 unaudited financial statements and pro forma combined statements, including the accounting effects of the business combination.
- Assess liquidity after the approximately $99 million redemption, including the limited remaining availability under revolving working-capital facilities.
- Verify the terms, timing and funding source for the $20 million Seller payment and related 8% interest obligation.
- Monitor wheat prices, freight costs, foreign exchange and the effect of Moroccan subsidies on margins.
- Evaluate whether the planned mill expansion reaches the stated 2,370 metric tons of additional daily capacity within 30 months and the related capital requirements.
- Consider dilution from approximately 15.8 million outstanding warrants, the PIPE shares, bond conversions, loan conversions and the employee incentive plan.
- Note the concentrated ownership: Lighthouse Settlement beneficially owned approximately 66.9% of outstanding ordinary shares immediately after closing.
- Confirm subsequent filings for audited post-combination results, cash flows, debt balances, covenant compliance and any changes to the Seller payment or financing arrangements.