AGJUNCTION INC. Interim Management's Discussion and Analysis
Three and six month periods ended June 30, 2021
(Expressed in U.S. dollars)
AgJunction Inc.
Management's Discussion and Analysis
Three and six month period ending June 30, 2021
The following discussion and analysis are effective as of August 11, 2021 and should be read together with our unaudited condensed consolidated interim financial statements and accompanying notes for the three and six months ended June 30, 2021. Additional information related to AgJunction Inc., including the Company's Annual Information Form, can be obtained from documents filed on the System for Electronic Document Analysis and Retrieval ("SEDAR") on the internet at www.sedar.com. All amounts stated in this Management Discussion and Analysis ("MD&A") are in US dollars unless otherwise stated.
COVID-19
In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. Although vaccination progress has been made, COVID-19 continues to impact the Company's financial results primarily due to delayed, reduced, or canceled partner development programs. These limitations are causing inefficiencies in contracting, while continued travel restrictions in the regions in which the Company does business are delaying qualification testing and integration. Additionally, delayed production orders due to the COVID-19 pandemic continue to impact the Company's financial results. The recent announcement by the world's largest trade fair for agricultural machinery, Agritechnica, will be delayed until Q1 2022 may further impact OEMs decision to launch new products, which may negatively impact revenues, profitability and cash flows for the Company as compared with historical results.
The Company has taken proactive steps to prevent the spread of COVID-19 amongst employees. In response to rising COVID-19 cases in Arizona, the Company returned to a flexible work schedule on August 2, 2021, and will delay its office re-openings at least until October 2021. The Company continues to operate a business continuity plan that is resulting in temporarily higher inventory levels to mitigate supply chain risks caused by the COVID-19 pandemic. Due to its proactive increase in inventory, the Company does not expect current global supply chain constraints to materially impact the Company's 2021 financial results.
The Company continues to follow all protocols issued by the government at local, state and federal levels. The Company is unable to quantify all potential impacts this pandemic may have on its future financial performance.
Overview
References throughout this document to AgJunction or the "Company" all refer to AgJunction Inc. and its subsidiaries.
AgJunction is a public company listed on the Toronto Stock Exchange that provides innovative hardware and software solutions for precision agriculture worldwide.
Economic and Market Trends
Agriculture Markets
The financial condition and confidence of farmers are factors impacting the Company's sales volume and product mix. The United States Department of Agriculture (USDA) forecasts inflation-adjusted net cash farm income to decrease by 7.5 percent from 2020 driven by lower direct Government farm payments. Purdue's Ag Economy Barometer released on July 6, 2021, fell for the second month with weakening perceptions of current conditions and future expectations. Purdue's Ag Economy Barometer also shows a 4-point reduction in farmers planning on increasing machinery purchases. Although the financial condition and confidence is decreasing, the Associated Press reported on July 3, 2021, that farm labor shortages are getting worse. Constrained labor may result in increasing adoption of precision farm automation.
The Company's sales volume, particularly the indirect business, is related to the sale of agricultural tractors and combines by OEMs. In June 2021, the Association of Equipment Manufacturers reported a 16.7 percent increase in YTD total farm tractor sales compared to the same period in 2020. Sales of self-propelled combines were reported to have increased by 11 percent YTD compared to the same period in 2020. The Conveyor Equipment Manufacturers Association ("CEMA") provides a more forward-looking Business Climate Index for
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the Agricultural Machinery Industry in Europe. The Business Climate Index for July shows a 4-point decline, which indicates that a peak was reached earlier this year. Although the current business climate is positive, the data shows that many agricultural machinery producers in Europe are expecting lower growth in the coming six months. According to CEMA, some of this weakness is due to agricultural machinery companies reporting supply chain bottle necks.
Although the market continues to be uncertain, management's outlook remains positive. Overall growth will continue to be driven by population growth, limited arable land, and relatively low global penetration of machine automation solutions for precision agriculture and other off-road applications.
Summary of Quarterly Results
(000's) | 30-Sep | 31-Dec | 31-Mar | 30-Jun | 30-Sep | 31-Dec | 31-Mar | 30-Jun | ||||||||
2019 | 2019 | 2020 | 2020 | 2020 | 2020 | 2021 | 2021 | |||||||||
Revenue | $ | 8,641 | $ | 3,291 | $ | 5,201 | $ | 4,601 | $ | 3,821 | $ | 2,684 | $ | 2,456 | $ | 3,356 |
Gross Profit | 2,787 | 1,511 | 2,943 | 1,856 | 1,899 | 1,293 | 986 | 1,516 | ||||||||
32.3% | 45.9% | 56.6% | 40.3% | 49.7% | 48.2% | 40.2% | 45.2% | |||||||||
Expenses: | ||||||||||||||||
Research and development | 1,901 | 440 | 1,054 | 1,110 | 1,250 | 1,383 | 1,310 | 1,228 | ||||||||
Sales and marketing | 1,186 | 707 | 840 | 302 | 503 | 508 | 526 | 566 | ||||||||
General and administrative | 2,233 | 3,589 | 1,601 | 1,758 | 1,360 | 1,526 | 1,566 | 1,733 | ||||||||
Total Operating Expenses | 5,320 | 4,736 | 3,495 | 3,170 | 3,113 | 3,417 | 3,402 | 3,527 | ||||||||
Operating (loss) | (2,533) | (3,225) | (552) | (1,314) | (1,214) | (2,124) | (2,416) | (2,011) | ||||||||
Interest and other (income) loss | (83) | (85) | (59) | (19) | (11) | (5) | (5) | (2) | ||||||||
Foreign exchange (gain) loss | 86 | (48) | 28 | 4 | 54 | 37 | 9 | 4 | ||||||||
Loss (gain) on sale of property, plant | (9) | 14 | - | - | 67 | 72 | - | - | ||||||||
and equipment | ||||||||||||||||
Total Other (Income) Expenses | (6) | (119) | (31) | (15) | 43 | 104 | 4 | 2 | ||||||||
Net (loss) before income taxes | (2,527) | (3,106) | (521) | (1,299) | (1,257) | (2,228) | (2,420) | (2,013) | ||||||||
Income tax expense (benefit) | (2) | - | - | - | - | - | - | - | ||||||||
Net (loss) | (2,525) | (3,106) | (521) | (1,299) | (1,257) | (2,228) | (2,420) | (2,013) | ||||||||
Earnings (loss) per common share: | ||||||||||||||||
Basic and diluted | $ | (0.02) | $ | (0.03) | $ | - | $ | (0.01) | $ | (0.01) | $ | (0.02) | $ | (0.02) | $ | (0.02) |
Weighted Average Diluted Shares | 118,153 | 117,775 | 116,961 | 118,802 | 121,092 | 121,092 | 121,105 | 120,818 |
Sales by geographic region on a quarterly basis are as follows:
For the Quarter Ended
(000's) | 30-Sep | 31-Dec | 31-Mar | 30-Jun | 30-Sep | 31-Dec | 31-Mar | 30-Jun | ||||||||
2019 | 2019 | 2020 | 2020 | 2020 | 2020 | 2021 | 2021 | |||||||||
Americas | $ | 2,790 | $ | 2,907 | $ | 4,016 | $ | 3,807 | $ | 2,717 | $ | 1,311 | $ | 1,875 | $ | 2,007 |
APAC | 181 | 89 | 494 | 257 | 530 | 155 | 72 | 712 | ||||||||
EMEA | 5,670 | 295 | 691 | 537 | 574 | 1,218 | 509 | 637 | ||||||||
$ | 8,641 | $ | 3,291 | $ | 5,201 | $ | 4,601 | $ | 3,821 | $ | 2,684 | $ | 2,456 | $ | 3,356 |
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Quarterly results have varied during the past eight quarters due, in part, to the following factors:
- A large component of the Company's revenue is derived from the North American agriculture markets which are subject to the seasonality of the global agricultural buying season with substantial variations and product mix sold during the year. Normally, this leads to the first half of the year being the strongest and the second half being the weakest. Initiatives to mitigate the Company's seasonality include revenue efforts in the Southern Hemisphere which is counter-seasonal to the Northern Hemisphere agricultural seasons and strategies focused on increasing sources of recurring revenue.
- The Company entered into a Bulk Purchase Order ("BPO") in 2018 to supply its auto steering solutions for an aggregate purchase price of $55 million. The BPO ended in the third quarter of 2019, which resulted in a decrease in revenue in the fourth quarter of 2019 compared to the third quarter of 2019. Revenues decreased from the first quarter of 2020 to the first quarter of 2021 as a result of COVID-19 reducing demand due to delayed, reduced, or cancelled partner developments. Revenues increased in the second quarter of 2021 as a result of increased demand in the Americas, increased aftermarket and direct sales, and higher non-recurring engineering revenue.
- Gross profit percentage fluctuates as a result of sales mix as well revenue levels. Gross profit increased to 56.6% in the first quarter of 2020 due to an increase in higher margin non-recurring engineering revenue and decreased to 40.3% in the second quarter of 2020 as a result of revenue mix. Gross profit percentage decreased to 40.2% in the first quarter of 2021 as a result of reduced volume from a high margin customer.
- Net loss decreased to ($521) in the first quarter of 2020 largely as a result of reduced operating expenses as a result of the closure of the Brisbane, Australia and Fremont, California locations. Net loss increased to ($2,228) in the fourth quarter of 2020 as a result of lower revenues and higher operating expenses resulting largely from higher research and development expenses due to higher amortization from projects capitalized in the last half of 2020.
Quarter Ended June 30, 2021 versus Quarter Ended June 30, 2020
Revenues
For the quarter ended June 30, 2021, revenues were $3,356 representing a decrease of 27.1% compared to $4,601 in the same quarter of 2020. The revenue decrease of 1,245 is primarily due to reduced revenue volume with one major customer. Strategic steps have been taken to reverse this trend.
(000's) | 2021 | 2020 | Change | ||
Agriculture | $ | 3,356 | $ | 4,601 | (27.1%) |
Sales by geographic region | |||||
(000's) | 2021 | 2020 | Change | ||
Americas | $ | 2,007 | $ | 3,807 | (47.3%) |
APAC | 712 | 257 | 177.0% | ||
EMEA | 637 | 537 | 18.6% | ||
$ | 3,356 | $ | 4,601 | (27.1%) |
In the second quarter of 2021, revenues in the Americas decreased by $1,800 or 47.3% due to reduced revenue volume from one major customer, somewhat offset by increased e-commerce revenues. Revenue in APAC increased by $455 due to an increase in non-recurring engineering revenue. Revenue in the EMEA region increased from the second quarter of 2020 to second quarter of 2021 by $100 or 18.6% due to new customers in Russia.
Sales to customers in the Americas represented 59.8% of total revenues in the second quarter of 2021 compared to 82.7% in the second quarter of 2020. Sales in APAC represented 21.2% of total revenues in the second quarter of 2021 an increase from 5.6% in the second quarter of 2020. EMEA sales represented 19.0% of total revenues for the quarter, an increase from 11.7% in the same period in 2020.
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Gross Profits
Gross profits were $1,516 for the second quarter of 2021 compared to $1,856 for the second quarter of 2020. Gross profits, as a percentage of revenue, were 45.2% in the second quarter of 2021 compared to 40.3% in the second quarter of 2020. The increase is primarily due to a negative one-time adjustment relating to inventory carrying charges in the second quarter of 2020.
Expenses
Total operating expenses for the second quarter of 2021 increased 11.3% or $357 to $3,527 from $3,170 in the second quarter of 2020. A breakout of expenses by line item follows.
Research and development expenditures of $1,228 during the second quarter of 2021 increased from $1,110 in the second quarter of 2020 representing an increase of $118 or 10.6%. This increase is related primarily to an increase in amortization expense for prior year capitalized rather than expensed projects.
Sales and marketing expenses during the second quarter of 2021 were $566, $264 or 87.4% higher than the $302 in the second quarter of 2020. Sales and marketing expenses in 2020 were reduced by compensation cost recoveries largely from share compensation forfeitures.
General and administrative expenses for the second quarter of 2021 were $1,733 compared to $1,758 in 2020 representing a decrease of $25 or 1.4%. General and administrative expenses were negatively impacted in the second quarter of 2021 due to an increase in allowance for doubtful accounts and a one-time fee associated with shutting down the third-party manufacturing for a portion of the year, which will result in cost savings in the last half of the year. General and administrative expenses were negatively impacted in the second quarter of 2020 due to costs associated with closing the Fremont, California location.
Interest, Foreign Exchange, and Other Income
In the second quarter of 2021, the Company recorded net interest and other income of $2 compared to income of $19 in the second quarter of 2020. The decrease in interest income is a result of lower interest rates and a lower cash balance in the second quarter of 2021 than in the second quarter of 2020. The Company earns interest income on certain cash balances which is offset by interest paid.
The Company realized a foreign exchange loss of $4 in the second quarter of 2021 and 2020. Foreign exchange gains and losses arise primarily from the translation and settlement of non-US dollar working capital.
Income Tax Benefit
The Company recognized no income tax for the quarters ended June 30, 2021 and 2020.
Net (Loss) Income
In the second quarter of 2021, the Company realized a net loss from continuing operations of $2,013 or ($0.02) per share (basic and diluted), compared to net loss from continuing operations of $1,299 or $0.01 per share (basic and diluted) in the second quarter of 2020. The increase in net loss is primarily a result of lower revenue and higher research and development expenses and sales and marketing expenses, as discussed above.
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AgJunction Inc. published this content on 12 August 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 12 August 2021 11:41:06 UTC.
