20-F 1 f20f2020_brasilagro.htm ANNUAL REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

☐  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

☒  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2020

 

OR

 

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-35723

 

BRASILAGRO – COMPANHIA BRASILEIRA DE
PROPRIEDADES AGRÍCOLAS

(Exact name of Registrant as specified in its charter)

 

BrasilAgro – Brazilian Agricultural Real Estate Company

(Translation of Registrant’s name into English)

 

The Federative Republic of Brazil

(Jurisdiction of incorporation or organization)

 

Av. Brigadeiro Faria Lima, 1309, 5th floor, São Paulo, SP 01452-002, Brazil

(Address of principal executive offices)

 

Gustavo Javier Lopez

Chief Administrative Officer and Investor Relations Officer

Tel.: +55 11 3035 5350 – E-mail: ri@brasil-agro.com

Av. Brigadeiro Faria Lima, 1309, 5th floor
São Paulo, SP 01452-002, Brazil

(Name, Telephone, E-mail or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
American Depositary Shares, each representing one ordinary share, no par value   LND   New York Stock Exchange
         
Ordinary Shares*   —   New York Stock Exchange*

 

* Not for trading, but only in connection with the registration of American Depositary Shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

 

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

Ordinary shares, no par value   62,104,301 

  

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐   No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐  No ☐ (Note: None required for registrant)

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐
    Emerging growth company ☒

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ☐

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

 Other ☐

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐  Item 18 ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
Part I 1
   
INTRODUCTION 1
   
ITEM 1—IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 3
ITEM 2—OFFER STATISTICS AND EXPECTED TIMETABLE 3
ITEM 3—KEY INFORMATION 3
ITEM 4—INFORMATION ON THE COMPANY 25
ITEM 4A—UNRESOLVED STAFF COMMENTS 46
ITEM 5—OPERATING AND FINANCIAL REVIEW AND PROSPECTS 46
ITEM 6—DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 69
ITEM 7—MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 77
ITEM 8—FINANCIAL INFORMATION 81
ITEM 9—THE OFFER AND LISTING 86
ITEM 10—ADDITIONAL INFORMATION 89
ITEM 11—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 117
ITEM 12— DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 118
   
Part II 120
   
ITEM 13—DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 120
ITEM 14—MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 120
ITEM 15—CONTROLS AND PROCEDURES 120
ITEM 16A—AUDIT COMMITTEE FINANCIAL EXPERT 121
ITEM 16B—CODE OF ETHICS 121
ITEM 16C—PRINCIPAL ACCOUNTANT FEES AND SERVICES 122
ITEM 16D—EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 122
ITEM 16E—PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 123
ITEM 16F—CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 123
ITEM 16G—CORPORATE GOVERNANCE 123
ITEM 16H—MINE SAFETY DISCLOSURE 124
   
Part III 125
   
ITEM 17—FINANCIAL STATEMENTS 125
ITEM 18—FINANCIAL STATEMENTS 125
ITEM 19—EXHIBITS 125

  

 i 

 

 

Part I

 

INTRODUCTION

 

Unless the context otherwise requires, the term “BrasilAgro” refers to BrasilAgro – Companhia Brasileira de Propriedades Agrícolas and its consolidated subsidiaries; and unless indicated otherwise, the terms “we,” the “Company,” “our” or “us” refer to BrasilAgro. The term “Brazil” refers to The Federative Republic of Brazil.

 

Presentation of Financial Information

 

All references in this annual report to “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “dollars” or “US$” are to U.S. dollars, the official currency of the United States of America.

 

On June 30, 2020, the end of our last fiscal year, the exchange rate for reais into U.S. dollars was R$5.4760 to US$1.00, based on the selling rate as reported by the Central Bank of Brazil (Banco Central do Brasil), or the Central Bank. On June 30, 2019, the selling rate was R$3.8322 to US$1.00. The selling rate was R$3.8552 to US$1.00 on June 30, 2018, R$3.3082 to US$1.00 on June 30, 2017 and R$3.2098 to US$1.00 on June 30, 2016, in each case, as reported by the Central Bank. The real/U.S. dollar exchange rate fluctuates widely, and the selling rate on June 30, 2020 may not be indicative of future exchange rates. On September 30, 2020, the selling rate was R$5.6407 to US$1.00 and, on October 28, 2020, the selling rate was R$5.7325 to US$1.00, as reported by the Central Bank.

 

Financial Statements

 

The Brazilian real is our functional currency and that of our subsidiaries located in Brazil, and is also the currency used for the preparation and presentation of our consolidated financial statements. Our fiscal year is from July 1 of each year to June 30 of the following year.

 

We prepare our annual consolidated financial statements in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB.

 

The selected financial information should be read together with our audited consolidated financial statements, including the notes thereto, included elsewhere in this annual report.

 

Crop Year, Harvest and Planting Season

 

Our agricultural production is based on the crop year, which varies according to each crop. The crop year for sugarcane is from January 1 to December 31 of each year, and the crop year for grains is from July 1 of each year to June 30 of the following year. We also make reference in this annual report to the planting season and the harvest season, or harvest period. In Brazil, the planting season for grains is from September to December of each year, and the planting season for sugarcane is from February to May of each year. The harvest period in Brazil for grains is from February to July of each year, and such period for sugarcane is from April to November of each year.

 

Market Information

 

The market information included in this annual report concerning the Brazilian economy and the domestic and international agriculture industry was obtained from market research, publicly available information and industry publications from established public sources, such as the Central Bank, the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or the IBGE, the Brazilian Food Supply Company (Companhia Nacional de Abastecimento), or Conab, which is a state-owned company, the Brazilian Ministry of Agriculture, Livestock and Food Supply (Ministério da Agricultura, Pecuária e Abastecimento), or MAPA, the U.S. Department of Agriculture, or USDA, the U.S. Food and Agriculture Organization, or FAO, the United Nations, and the Organization for Economic Cooperation and Development, or OECD, as well as from other public institutions and independent sources as indicated throughout this annual report. We believe that such information is true and accurate as of the date it was made available, although we have not independently verified it.

 

 1 

 

 

Rounding

 

Certain percentages and amounts included in this annual report have been rounded for ease of presentation. Accordingly, figures shown as totals in certain tables may not be arithmetic aggregations of the figures that precede them.

 

Emerging Growth Company Status

 

We are an “emerging growth company,” as defined in Section 3(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Therefore, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, or any Public Company Accounting Oversight Board, or “PCAOB,” rules, which, if adopted in the future, would require mandatory audit firm rotation and auditor discussion and analysis pursuant to any future audit rule promulgated by the PCAOB (unless the U.S. Securities and Exchange Commission, or the SEC, determines otherwise). We take advantage of the exemption from providing an auditor’s attestation report and may decide to rely on other exemptions in the future, such as compliance with certain PCAOB rules. We do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and our stock price may become more volatile.

 

We could remain an “emerging growth company” until the earliest of (a) the last day of the first fiscal year in which our annual gross revenue exceeds US$1.07 billion, (b) the last day of our fiscal year following the fifth anniversary of the date of our first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended, or the Securities Act, (c) the date on which we have issued more than US$1 billion in non-convertible debt during the preceding three-year period, or (d) the date on which we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter.

 

Forward-Looking Statements

 

This annual report includes statements that constitute forward-looking statements. These statements are based on the beliefs and assumptions of our management and on information available to our management at the time such statements were made. Forward-looking statements include, but are not limited to: (a) information concerning possible or assumed future results of our operations, earnings, industry conditions, demand and pricing for our services and other aspects of our business described under “Item 4—Information on the Company,” “Item 5—Operating and Financial Review and Prospects” and “Item 11—Quantitative and Qualitative Disclosures About Market Risk”; and (b) statements that are preceded or followed by, or include, the words “believes,” “expects,” “anticipates,” “intends,” “is confident,” “plans,” “estimates,” “may,” “might,” “could,” “will,” “would,” the negatives of such terms or similar expressions.

 

The forward-looking statements included in this annual report relate to, among other factors:

 

●our business prospects and future results of operations;

 

●weather and other natural phenomena;

 

●the length and severity of the recent novel coronavirus (COVID-19) pandemic, or the COVID-19 pandemic;

 

●developments in, or changes to, the laws, regulations and governmental policies governing our business, including limitations on ownership of farmland by foreign entities in certain jurisdiction in which we operate, environmental laws and regulations;

 

●the implementation of our business strategy;

 

●our plans relating to acquisitions, joint ventures, strategic alliances or divestitures;

 

●the implementation of our financing strategy and capital expenditure plan;

 

●the maintenance of relationships with our customers;

 

 2 

 

 

●the competitive nature of the industry in which we operate;

 

●the cost and availability of financing;

 

●future demand for the commodities we produce;

 

●international prices for commodities;

 

●the condition of our land holdings;

 

●the development of the logistics and infrastructure for transportation of our products in the countries where we operate;

 

●the performance of the Brazilian and world economies;

 

●the relative value of the Brazilian real compared to other currencies; and

 

●the factors discussed under “Item 3—Key Information—3.D. Risk Factors” in this annual report.

 

Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Many of the factors that will determine these results are beyond our ability to control or predict.

 

Any of the risk factors described under “Item 3—Key Information—Risk Factors” and those described elsewhere in this annual report or in our other filings with the SEC, among other things, could cause our results to differ from any results or conditions that might be projected, forecasted or estimated by us in any such forward-looking statements.

 

We undertake no obligation to publicly update any forward-looking statement, whether because of new information, future events or otherwise, except as required by applicable law or stock exchange regulation. Investors are cautioned not to put undue reliance on any forward-looking statements. 

 

ITEM 1—IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2—OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3—KEY INFORMATION

 

A.Selected Consolidated Financial Data

 

We prepare our annual consolidated financial statements in accordance with IFRS as issued by the IASB.

 

Due to the nature of our business and the harvest periods in the locations where we operate, our fiscal year ends on June 30 of each year. References in this annual report to a specific fiscal year relate to the fiscal year ended on June 30 of that calendar year, unless indicated otherwise.

 

The selected financial data has been derived from our audited consolidated financial statements as of June 30, 2020, 2019, 2018, 2017 and 2016, and for each of the years ended June 30, 2020, 2019, 2018, 2017 and 2016. The information set forth below is qualified by reference to, and should be read in conjunction with, our audited consolidated financial statements and the notes thereto and also “Item 5—Operating and Financial Review and Prospects” included in this annual report.

 

 3 

 

 

Effects of the adoption of the amendments to IAS 41 and IAS 16

 

In 2014, the IASB amended IAS 16 and IAS 41, which distinguish bearer plants from other biological assets. Bearer plants are solely used to grow products over their productive lives and are seen to be similar to an item of property, plant and equipment under the scope of IAS 16, rather than other biological assets that falls under the scope of IAS 41. However, the agricultural products growing on bearer plants remain within the scope of IAS 41 and are measured at fair value less cost to sell. The amendments were applicable as from our fiscal year ended June 30, 2017.

 

Our sugarcane plantations qualify as bearer plants under the new definition in IAS 41. As required under IAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors,” we effected the change in accounting policy retrospectively as of July 1, 2014. The standard became effective as from our fiscal year commencing on July 1, 2016 and, consequently, our sugarcane was reclassified to property, plant and equipment, measured at cost and depreciated over its useful life on a straight-line basis. We adopted the transitional rule provided for in the amendment, which allowed us to apply the fair value of bearer plants as their deemed cost as of July 1, 2014. Accordingly, we revised the comparative financial data amounts for the year ended June 30, 2016.

 

In order to improve the presentation of leases payable in the statement of financial position starting in the fiscal year ended June 30, 2020, all lease payables are presented under “leases payable.” For comparability purposes, leases payable that were presented under “trade accounts payable and others” and under “finance leases” as of June 30, 2019 were also reclassified under “leases payable.” See Note 2.1 to the financial statements included in this annual report. Accordingly, financial data as of June 30, 2018, 2017 and 2016 have not been revised, and are not comparable to the financial data as of June 30, 2020 and 2019.

 

   Year ended June 30, 
   2020   2019   2018   2017   2016 
   (in R$ thousands, except share and per share information) 
CONSOLIDATED STATEMENT OF INCOME                    
Revenue   487,568    357,910    244,278    146,911    147,128 
Gain on sale of farms   61,420    142,812    39,817    26,716    — 
Changes in fair value of biological assets and agricultural products   160,371    56,718    99,083    12,266    (12,632)
Adjustments to net realizable value of agricultural products after harvest, net   (4,153)   (2,040)   883    (1,655)   659 
Cost of sales   (483,813)   (319,214)   (228,319)   (136,362)   (134,714)
Gross profit   221,393    236,186    155,742    47,876    441 
Selling expenses   (14,300)   (10,536)   (10,087)   (6,676)   (2,732)
General and administrative expenses   (43,890)   (38,812)   (34,945)   (30,941)   (28,944)
Other operating income (expenses), net   1,231    (1,064)   35,432    (6,019)   2,812)
Share of (loss) profit of a joint venture   (150)   1,102    14,671    (4,425)   (511)
Operating income (loss)   164,284    186,876    160,813    (185)   (28,934)
Financial income   375,413    310,538    129,323    110,090    192,644 
Financial expenses   (406,168)   (297,616)   (137,879)   (76,646)   (154,270)
Financial (expense) income, net   (30,755)   12,922    (8,566)   33,444    38,374 
Profit before income and social contribution taxes   133,529    199,798    152,257    33,259    9,440 
Income and social contribution taxes   (13,975)   (22,719)   (25,919)   (5,949)   (1,451)
Net Profit for the year   119,554    177,079    126,338    27,310    7,989 
Profit attributable to equity holders of the parent   119,554    177,079    126,338    27,310    7,989 
Issued shares at the fiscal year end   62,104,301    56,888,916    56,888,916    56,888,916    58,226,600 
Basic earnings per share   2.11    3.29    2.35    0.48    0.14 
Diluted earnings per share   2.09    3.27    2.35    0.48    0.14 
CONSOLIDATED CASH FLOW                         
Net cash flows from (used in) operating activities   69,024    51,338    (2,264)   65,051    (6,440)
Net cash flows (used in) from investing activities   (29,295)   (21,266)   (65,700)   (13,527)   149,773 
Net cash flows (used in) from financing activities   18,451    (27,621)   125,414    (61,930)   (164,749)

 

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   Year ended June 30, 
   2020   2019   2018   2017   2016 
   (in R$ thousands) 
CONSOLIDATED STATEMENT OF FINANCIAL POSITION                    
Assets                    
Current assets                    
Cash and cash equivalents   171,045    106,627    104,314    43,798    54,204 
Marketable securities   —    4,038    11,215    6,972    113,559 
Accounts receivable and others   183,350    125,320    95,176    54,026    31,072 
Inventories   138,778    97,068    69,622    22,658    18,197 
Biological assets   115,553    99,881    61,993    38,260    22,285 
Derivative financial instruments   7,180    5,906    28,299    4,090    24,497 
Transactions with related parties   701    1,987    1,660    1,298    1,065 
Total current assets   616,607    440,827    372,279    171,102    264,879 
                          
Non-current assets held for sale   25,857    —    —    —    — 
                          
Non-current assets                         
Biological assets   25,444    23,235    34,053    13,435    5,241 
Restricted marketable securities   5,044    9,114    18,226    17,088    20,353 
Transactions with related parties   1,511    —    —    35,640    44,363 
                          
Deferred taxes   23,282    20,510    32,742    53,780    55,594 
Derivative financial instruments   1,746    1,013    4,053    1    — 
Accounts receivable and others   262,387    203,533    74,775    44,605    42,497 
Investment properties   858,261    548,717    557,152    389,799    287,867 
Investments   5,742    1,256    86    101,426    102,955 
Property, plant and equipment   115,925    107,852    84,830    54,745    27,803 
Intangible assets   1,469    1,557    1,403    1,672    3,450 
Right-of-use assets   101,093    —    —    —    — 
Total non-current assets   1,401,904    916,787    807,320    712,191    590,123 
Total assets   2,044,368    1,357,614    1,179,599    883,293    855,002 
Liabilities and equity                         
Current liabilities                         
Trade accounts payable and others   111,170    92,954    106,445    55,615    26,602 
Loans, financing and debentures   217,274    76,608    68,412    56,620    51,615 
Salaries and Payroll obligations   19,600    17,093    14,300    11,513    8,856 
Derivative financial instruments   18,333    11,055    10,489    3,978    2,165 
Payables for purchase of farms   5,017    —    —    24,646    22,261 
Transactions with related parties   2,849    2,405    1,831    4,784    536 
Leases payable   25,849    26,503    —    —    — 
Financial leases   —    —    1,676    —    — 
Total current liabilities   400,092    226,618    203,153    157,156    112,035 
                          
Non-current liabilities                         
Trade accounts payable and others   28,002    19,451    11,298    1,520    1,402 
Loans, financing and debentures   296,839    209,245    187,393    55,555    48,230 
Deferred taxes   34,031    —    —    —    — 
Leases payable   126,514    20,943    —    —    — 
Financial leases   —    —    18,539    —    — 
Derivative financial instruments   1,462    —    2,145    —    4,392 
Provision for legal claims   1,485    824    1,207    1,594    1,455 
Other liabilities   34,374    —    —    —    — 
                          
Total non-current liabilities   522,707    250,463    220,582    58,669    55,479 
Equity                         
                          
Capital   699,811    584,224    584,224    584,224    584,224 
Capital reserve   (34,292)   3,645    1,997    1,525    1,771 
Treasury shares   (31,501)   (35,208)   (35,208)   (36,797)   (37,203)
Income reserves   358,606    281,052    164,968    75,101    98,691 
Additional dividends proposed   13,606    7,944    —    —    — 
Other comprehensive income   115,339    38,876    39,883    43,415    40,005 
                          
 Total equity   1,121,569    880,533    755,864    667,468    687,488 
                          
Total liabilities and equity   2,044,368    1,357,614    1,179,599    883,293    855,002 

 

 5 

 

 

We have included in this annual report information with respect to dividends and interest on shareholders’ equity paid to holders of our common shares since the fiscal year ended June 30, 2016 in reais and in U.S. dollars translated from reais at the commercial market selling rate in effect as of the payment date under the caption “Item 8—Financial Information—Dividends and Dividend Policy—Recent Dividend Payments.”

  

Exchange Rates

 

Our dividends, when paid in cash, are denominated in reais. As a result, exchange rate fluctuations have affected and will affect the U.S. dollar amounts received by holders of ADSs on conversion of such dividends by The Bank of New York, as the ADS depositary. The Bank of New York converts dividends it receives from reais into U.S. dollars upon receipt, by sale or such other manner as it has determined, and distributes such U.S. dollars to holders of ADSs, net of The Bank of New York’s expenses of conversion, any applicable taxes and other governmental charges. Exchange rate fluctuations may also affect the U.S. dollar price of the ADSs.

 

The Brazilian government may impose temporary restrictions on the conversion of reais into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Brazil. Brazilian law permits the government to impose these restrictions whenever it determines there is an imbalance in Brazil’s balance of payments or reason to expect that one will occur.

 

On June 30, 2020, the real/U.S. dollar exchange rate was R$5.4760 per US$1.00. On September 30, 2020, the real/U.S. dollar exchange rate was R$5.6407 per US$1.00 and, on October 28, 2020, the selling rate was R$5.7325 to US$1.00.

 

B.Capitalization and Indebtedness

 

Not applicable.

 

C.Reasons for the offer and use of proceeds

 

Not applicable.

 

D.Risk Factors

 

Risks Relating to our Business and Industry

 

We may be exposed to risks related to health epidemics and pandemics, such as the COVID-19 pandemic, which could adversely affect our business and results of operations.

 

In December 2019, a novel strain of coronavirus known as COVID-19 surfaced in Wuhan, China. The outbreak was declared a global pandemic by the World Health Organization on March 11, 2020. The speed and extent of the spread of COVID-19, and the duration and intensity of resulting business disruption and related financial and social impact are uncertain. We cannot foresee the extent, duration and the impacts of the measures adopted by the Brazilian or other governments to control the spread of the COVID-19 pandemic. There are no recent comparable events that may guide us. Outbreaks of contagious diseases could have an adverse effect on our business and operations.

 

 6 

 

 

In March 2020, we developed and implemented a plan comprised of certain measures to protect the health of our employees, prevent the spread of COVID-19 at our facilities and mitigate its effects on our operations. These measures included:

 

●the creation of a Prevention and Risk Committee to assess the overall situation, propose and revise preventive measures and actions to minimize risks, and coordinate the implementation of action plans;

 

●the adoption of a remote work policy for employees who are in certain risk groups or who work at our corporate headquarters in São Paulo;

 

●the implementation of certain measures and protocols to protect the safety of all persons involved in our operations, pursuant to the guidelines of the Brazilian Ministry of Health (Ministério da Saúde); and

 

●the adoption of contingency plans to prevent disruption in our operations.

 

Our operations in Brazil and Paraguay continued normally and, to date, we have not had had any material impact on our business and operations arising out of the COVID-19 pandemic.

 

However, the COVID-19 pandemic could affect our operations if a significant portion of our workforce is unable to work due to the spread of the virus, quarantines, government actions, the shutdown of facilities or other restrictions. Part of our revenue is generated by the sale of commodities to local customers, but the global market for such commodities relies on an extensive logistics and supply chain, including ports, distribution centers and suppliers. In addition, the high volatility of the Brazilian real/U.S. dollar exchange rate and the prices of commodities as a result of the impact of the COVID-19 pandemic could result in losses for us.

 

We have experienced strong demand for exports because of the appreciation of the U.S. dollar against the Brazilian real. We have not experienced any significant disruptions in our logistics and export operations, as well as in inbound shipments of raw materials and goods, most of which had been acquired prior to the imposition of quarantine restrictions in Brazil. We have also not experienced any material changes in commitments for the 2019/2020 crop year. Our management believes that we are well positioned to withstand the effects of the COVID-19 pandemic.

 

We have preserved our short-term and long-term liquidity, and changes in inbound and outbound shipments were scaled not to materially affect our financial position. We did not identify any significant risks with regard to our capacity to continue operating.

 

We are unable to determine the full extent to which the COVID-19 pandemic may impact our business or results of operations in the future, which will depend on future developments that are highly uncertain and cannot be predicted. See “—Risks Relating to Brazil—The measures taken or to be implemented by the Brazilian government in response to the COVID-19 pandemic may have an adverse effect on our business and operations.”

 

Our ability to implement our business strategy successfully may be adversely affected by numerous factors beyond our control, which may materially and adversely affect our business, financial condition and results of operations.

 

Our business strategy depends on our ability to acquire, develop, operate and sell our agricultural properties on a profitable basis. Our strategy is based on our ability to acquire agricultural properties at attractive prices, develop them into efficient and profitable operations and sell them at a profit in the medium and long term. These factors are essential for our prospects of success, but are subject to significant uncertainties, contingencies and risks within our economic, competitive, regulatory and operational environment, many of which are beyond our control. Our ability to execute our business strategy successfully is uncertain and may be adversely affected by any of the following factors, among others:

 

  ● failure to pursue our business strategy;

 

  ● failure or difficult to acquire and sell agricultural properties at attractive prices;

 

  ● changes in market conditions or failure to anticipate and adapt to new trends in Brazil’s rapidly evolving agricultural sector;

 

  ● inability to overcome certain limitations on the acquisition of land in Brazil by foreigners, as provided in the opinion of the Federal Attorney General, as further detailed in this annual report;

 

  ● failure to maintain the fiscal structure of our subsidiaries;

 

  ● inability to develop infrastructure and attract or retain personnel in a timely and effective manner;

 

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  ● inability to identify service providers for our agricultural properties and projects;

 

  ● increased competition for suitable land from other agricultural real estate owners or developers, which increases our costs and adversely affects our profit margins;

 

  ● inability to develop and operate our agricultural properties profitably, which may result from inaccurate estimates regarding the cost of infrastructure, other investments or operating costs;

 

  ● failure, delays or difficulties in obtaining necessary environmental and regulatory permits;

 

  ● failure by purchasers of our properties to meet their payment obligations to us;

 

  ● increased operating costs, including the need for improvements to fixed assets, insurance premiums and property and utility taxes and fees that affect our profit margins;

 

  ● adverse climate conditions, such as global warming, which may contribute to the change of frequency of unpredictable or uncommon meteorological phenomena such as hurricanes and typhoons, as well as unpredictable and unusual patterns of rainfall, among others;

 

  ● unfavorable climate conditions in Brazil or Paraguay, particularly in the regions where we carry out our activities;

 

  ● the economic, political and business environment in Brazil or Paraguay, and specifically in the geographic regions where we invest and operate;

 

  ● inflation, fluctuating interest rates and exchange rates;

 

  ● disputes and litigation relating to our agricultural properties; and

 

  ● labor, environmental, civil and pension liabilities.

 

We may not be able to continue acquiring suitable agricultural properties on attractive terms.

 

In recent years, investments in Brazil’s agriculture sector have increased substantially. As a result, demand and valuations for the kind of properties we seek to acquire have escalated significantly. We believe that prices for such properties are likely to continue to increase in the medium and long-term, perhaps significantly as demand is expected to remain high. We compete with local and foreign investors, many of whom are larger and have greater financial resources than we do. Such investors may be able to incur operating losses for a sustained period, retain their real estate investments for a longer period than we can or accept lower returns on such investments. As a result, such investors may be willing to pay substantially higher prices for agricultural properties than we are able or willing to, depriving us of opportunities to acquire the best agricultural properties or increasing our acquisition costs. As a result of the foregoing, we cannot assure you that we will be able to locate and acquire suitable investments on reasonable terms or at all, and our inability to do so would have a material adverse effect on us.

 

The imposition of restrictions on acquisitions of agricultural properties by foreign nationals may materially restrict the development of our business.

 

In August 2010, the then-president of Brazil approved the opinion of the Federal Attorney General affirming the constitutionality of Brazilian Law No. 5,709/71, which imposes important limitations on the acquisition and lease of land in Brazil by foreigners and by Brazilian companies controlled by foreigners. Pursuant to this legislation, companies that are majority-owned by foreigners are not allowed to acquire agricultural properties in excess of 100 indefinite exploration modules, or MEI (which are measurement units adopted by the National Institute of Agrarian Development (Instituto Nacional de Colonização e Reforma Agrária, or INCRA), within different Brazilian regions, and which range from five to 100 hectares) absent the prior approval of the Brazilian Congress, while the acquisition of areas measuring less than 100 MEIs by such companies requires the prior approval of INCRA. In addition, agricultural areas that are owned by foreigners or companies controlled by foreigners shall not exceed 25% of the surface area of the municipality, of which area up to 40% shall not belong to foreigners or companies controlled by foreigners of the same nationality, meaning that the sum of agricultural areas that belong to foreigners or companies controlled by foreigners of the same nationality shall not exceed 10% of the surface area of the relevant municipality. In addition, INCRA is also required to verify if the agricultural, cattle-raising, industrial or colonization projects to be developed in such areas were previously approved by the relevant authorities. After that analysis, INCRA will issue a certificate allowing the acquisition or rural lease of the property. The purchase and rural lease of agricultural properties that do not comply with the aforementioned requirements need to be authorized by the Brazilian Congress. In both cases, it is not possible to determine an estimated time frame for the approval procedure, since at the date of this annual report, there are no known cases on the grating of such certificates.

 

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Recently, Brazilian Law No. 13,986, of April 7, 2020, amended Law No. 5,709/91 and provided that the limitations mentioned above do not apply (i) to the pledge of real estate as collateral (including the fiduciary transfer of real estate property); and (ii) to debt settlements arising from the execution of real estate collateral. Both exceptions favor Brazilian companies controlled by foreigners or foreign entities, which creates new business opportunities.

 

As of September 30, 2020, approximately 60.96% of our common shares were held by foreigners. Bearing that in mind, the implementation of Law No. 5,709/71 may impose on us additional procedures and approvals in connection with our future acquisitions of land, which may result in material delays and our inability to obtain required approvals. There is also a case pending on the Supreme Court (Supremo Tribunal Federal, or STF) on the Opinion No. 461/2012-E, issued by São Paulo’s General Controller of Justice (Corregedoria Geral de Justiça do Estado de São Paulo), which has established that entities providing notary and registrar services located in the State of São Paulo are exempt from observing certain restrictions and requirements imposed by Law No. 5,709/71 and Decree No. 74,965/74. Moreover, on April 16, 2015, the Brazilian Rural Society filed a claim for the acknowledgment of non-compliance with basic principles (ADPF) under certain provisions of the Brazilian Constitution with the Supreme Court in order to (i) rule that paragraph 1, article 1, of Law No. 5,709/71 was repealed by the 1988 Federal Constitution and (ii) reverse the opinion issued by the Federal Attorney General (AGU) of 2010. As of the date hereof, we are not able to provide an estimate of the timeframe for a final judgment to be issued by the STF in both cases.

 

Depending on the final decisions of these pending lawsuits, we may need to modify our business strategy and intended practices in order to be able to acquire agricultural properties. This might have the effect of increasing the number of transactions we must complete, which would increase our transaction costs. It might also require the execution of joint ventures or shareholder agreements, which increases the complexity and risks associated with such transactions.

 

Any regulatory limitations and restrictions could materially limit our ability to acquire agricultural properties, increase the investments, transaction costs or complexity of such transactions, or complicate the regulatory procedures required, any of which could materially and adversely affect us and our ability to successfully implement our business strategy. For more information, see “Item 4—Information on the Company—Business Overview—Ownership of Agricultural Land in Brazil by Foreigners.”

 

A substantial portion of our assets consist of agricultural properties that are illiquid.

 

Our business strategy is based on the appreciation of the capital invested in our agricultural properties and the liquidity of those investments. We cannot assure you that the value of our agricultural properties will increase in the short-, medium- or long-term, or at all, or that we will be able to monetize our agricultural investments successfully. Agricultural real estate assets are, as a general rule, illiquid and volatile, and agricultural properties in Brazil are especially illiquid and volatile. As a result, it may be difficult for us to promptly adjust our portfolio of properties in response to changes in economic or business conditions, and we may be unable to find purchasers willing to acquire our agricultural properties at prices that are favorable to us. Lack of liquidity and volatility in local market conditions would adversely affect our ability to carry out sales of properties on a timely and profitable basis, which could have a material adverse effect on us.

  

We may not be profitable, or our cash flow may not be positive for a number of years.

 

We expect to incur significant capital and operating expenses for several years on account of our continuing development activities. Due to the capital-intensive and long-term nature of our real estate development activities, many of our properties will not generate immediate cash flows or provide a short-term return on investment. Therefore, we may not achieve positive cash flows or profitability for a number of years, and, even if we do, we cannot assure you that such positive cash flows or profitability will be sustained in the future. Should we fail to achieve and sustain profitability, our business, financial condition and results of operations and the market value of our common shares would be adversely affected.

 

 9 

 

 

Fluctuation in market prices for our agricultural products could adversely affect us.

 

We are not able to obtain hedging protection or minimum price guarantees for the entirety of our production and therefore we are exposed to significant risks associated with the level and volatility of crop prices. The prices we are able to obtain for our agricultural products from time to time will depend on many factors beyond our control, including:

 

●global commodity prices, which historically have been subject to significant fluctuations over relatively short periods of time, depending on worldwide food supply and demand as well as factors related to financial speculation;

 

●disruptions in commodity markets caused by global events, including the impact of the COVID-19 pandemic;

  

  ● weather conditions, or natural disasters in areas where agricultural products are cultivated;

 

  ● worldwide inventory levels (i.e., supply or stock of commodities carried over from year to year);

 

  ● the business strategies adopted by other major companies operating in the agricultural and agribusiness sectors;

 

  ● changes in agriculture subsidies with regard to certain important producers (mainly in the United States and the European Economic Community), trade barriers with regard to certain important consumer markets and the adoption of other government policies affecting market conditions and prices;

 

  ● available transportation methods and infrastructure development in the regions where we operate or in remote areas serving local markets and which affect the local prices of our crops; and

 

  ● cost of raw materials; and supply of and demand for competing commodities and substitutes.

 

Given the uncertainty around the extent and timing of the ongoing COVID-19 pandemic, we are unable to predict or anticipate its final effects on our business and results of operations. See “—We may be exposed to risks related to health epidemics and pandemics, such as the COVID-19 pandemic, which could adversely affect our business and results of operations.”

 

In addition, we believe there is a close relationship between the value of our agricultural properties and market prices of the commodities we produce, which are affected by global economic and other conditions. A decline in the prices of grains, sugar or related by-products below their current levels for a sustained period of time would significantly reduce the value of our land holdings and materially and adversely affect our business, financial condition and results of operations.

 

Ethanol prices are correlated with the price of sugar and are also closely correlated with the price of oil, so that a decline in the price of sugar or a decline in the price of oil may adversely affect our sugarcane business.

 

A vast majority of ethanol in Brazil is produced at sugarcane mills that produce both ethanol and sugar. Because sugarcane millers are able to alter their product mix in response to the relative prices of ethanol and sugar, the prices of both products are directly correlated, and the correlation between ethanol and sugar may increase over time. Sugar prices in Brazil are determined by prices in the world market, resulting in a correlation between Brazilian ethanol prices and world sugar prices.

 

In addition, gasoline prices in Brazil are controlled by the Brazilian government. Because flex-fuel vehicles, which have become popular in Brazil, allow consumers to choose between gasoline and ethanol at the pump, ethanol prices are correlated to gasoline prices and, consequently, oil prices.

 

Oil prices varied sharply in 2020, with a record demand shock along with excess supply created by internal dispute among OPEC members. In March 2020, a dispute between Saudi Arabia and Russia sparked oil price volatility. In addition, the COVID-19 pandemic has led to unprecedented changes in demand for oil.

 

A decline in sugar prices could have an adverse effect on the financial performance of our sugarcane businesses.

 

Substantially all of our revenue is derived from a small number of customers, and we currently face a risk of default by our main customer.

 

We currently sell a substantial portion of our total crop production to a small number of customers who have considerable bargaining power. For instance, in the year ended June 30, 2020, four of our customers were responsible for 72.8% of our revenue, and each of these four customers was responsible for at least 10% of our revenue. Of these four customers, two were responsible for 100% of our revenue in the sugarcane segment, and two were responsible for 61.2% of our revenue in the grains segment. Comparatively, in the year ended June 30, 2019, four of our customers were responsible for 85% of our revenue, and each of these four customers was responsible for at least 10% of our revenue. Of these four customers, two were responsible for 100% of our revenue in the sugarcane segment, and two were responsible for 71% of our revenue in the grains segment. See Note 20 to our financial statements included elsewhere in this annual report.

 

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Furthermore, we entered into a supply contract and a rural partnership agreement with Brenco – Companhia Brasileira de Energia Renovável – Em Recuperação Judicial (“Brenco”), which is controlled by Odebrecht S.A., pursuant to which we currently supply them with 100% of our sugarcane production from Alto Taquari, Araucária and Partnership III farms. The term of this supply contract covers two full crop cycles, which consists of six crop years and five harvests, and therefore is scheduled to expire in crop year 2021/2022. The term of this rural partnership agreement covers a total area of 5,782 hectares, which we will explore and operate until March 31, 2026.

 

In addition, we entered into a supply contract and a rural partnership agreement with Agro Pecuária e Industrial Serra Grande Ltda. (“Agro Serra”), pursuant to which we currently supply them with 100% of our sugarcane production from São José farm. The term of this supply contract covers at least 15 crop years, and therefore is scheduled to expire no earlier than in crop year 2032/2033, and encompasses a total area of 14,900 hectares, which we will explore and operate.

 

In addition, the strong competition between a relatively fragmented sector of agricultural producers in the internal and external markets further increases the bargaining power of our highly concentrated customer base. Thus, we may not be able to maintain or form new relationships with customers, which could have a material adverse effect on our business, financial condition and results of operations.

 

Concentration among our customer base also increases the adverse consequences to us should we lose any of our customers or if any of our customers defaults on their obligations to us, either in the form of non-payment or through a breach of any contractual provision or obligation, such as shipping failure or delays. Delays in the shipment of our products could directly affect the planning of our harvest, which could generate losses and result in additional costs to us.

 

In the year ended June 30, 2020 and as of the date hereof, Brenco has not defaulted on the payment of any receivable. However, we currently run the risk of default by Brenco, our main customer, due to the fact that its controlling shareholder, Odebrecht S.A., is being investigated for corruption in the operation called “Lava Jato” (Car Wash) and the fact that Brenco filed for reorganization bankruptcy in Brazil (recuperação judicial) in May 2019. Odebrecht’s former CEO has been arrested and the company has been facing the following issues: difficulties to access the credit market, decrease in its business activities, acceleration of debts, among others. Please see “Item 4—Information on the Company—Business Overview—Agricultural Activities and Products—Sugarcane” for a table presenting the aging of receivables from Brenco. Brenco’s controlling shareholder has been cutting costs, which can adversely affect Brenco, its business and its ability to meet its payments due to us. In addition, in May 2019, Brenco filed for reorganization bankruptcy in Brazil (recuperação judicial). As of the date hereof, we are unable to determine the impact, if any, that the reorganization bankruptcy of Brenco in Brazil may have on the payment of receivables due to us or on the general risk of default by Brenco on its obligations. As of June 30, 2020 and as of the date of this annual report, receivables from Brenco amounted to R$12.0 million and R$10.7 million, respectively.

 

We are dependent on third-party service providers and subject to recent changes in the Brazilian labor legal framework.

 

In addition to our own personnel, we are highly dependent on third-party contractors to develop and cultivate our agricultural properties, and to provide the machinery and equipment needed for such purposes. As a result, our future success depends on the skill, experience, knowledge and efforts of our third-party service providers. We cannot assure you that we will be able to continue to hire the desired third-party service providers for our agricultural properties or that such providers will have the ability to ensure quality agricultural production in an efficient manner, and at competitive prices. Our failure to hire the desired service providers for our agricultural properties, or their failure to provide quality services, or the revocation or termination or our failure to renew our service contracts or negotiate new contracts with other service providers at comparable prices and terms would adversely affect us.

 

Our dependence on third-party contractors also subjects us to the risk of labor claims alleging that an employment relationship exists between us and our contractors’ personnel, and that, as a result, we are secondarily liable for our contractors’ labor and social security payment obligations, lease payments or other obligations.

 

Moreover, pursuant to Brazilian environmental law, we are jointly and severally liable, together with our contractors, for all environmental damage caused by our third-party contractors, irrespective of our fault. Such obligations or our costs for defending against any such claims may be significant and could have a material adverse effect on us if we were held liable.

 

Changes in government policies involving biofuels may adversely affect our business, financial condition and results of operations.

 

Government policies for encouraging biofuels as a response to environmental concerns have had, and are likely to continue to have, an impact on commodities prices. The nature and scope of future legislation and regulations affecting our markets are unpredictable, and we cannot assure you that current concessions, prices or market protections involving biofuels will be maintained in their current form for any period of time. Any change in the support afforded to biofuels by the United States government or any other government may result in stagnation or decline in the market prices of certain agricultural commodities and consequently the price of our agricultural properties, which may adversely affect our business, financial condition and results of operations.

 

 11 

 

 

We are subject to extensive environmental regulation.

 

Our business activities in Brazil are subject to extensive federal, state and municipal laws and regulations concerning environmental protection, which impose on us various environmental obligations, such as environmental licensing requirements, minimum standards for the release of effluents, use of agrochemicals, management of solid waste, protection of certain areas (legal reserve and permanent preservation areas), and the need for a special authorization to use water, among others. The failure to comply with such laws and regulations may subject the violator to administrative fines, mandatory interruption of activities and criminal sanctions, in addition to the obligation to rectify damages and pay environmental and third-party damage compensation, without any caps. In addition, Brazilian environmental law adopts a joint and several and strict liability system for environmental damages, which makes the polluter liable even in cases where it is not negligent and would render us jointly and severally liable for the obligations of our contractors or off-takers. If we become subject to environmental liabilities, any costs we may incur to rectify possible environmental damage would lead to a reduction in our financial resources, which would otherwise remain at our disposal for current or future strategic investment, thus causing an adverse impact on our business, financial condition and results of operations.

 

As environmental laws and their enforcement become increasingly stricter, our expenses for complying with environmental requirements are likely to increase in the future. Furthermore, the possible implementation of new regulations, changes in existing regulations or the adoption of other measures could cause the amount and frequency of our expenditures on environmental preservation to vary significantly compared to present estimates or historical costs. Any unplanned future expenses could force us to reduce or forego strategic investments and as a result could materially and adversely affect our business, financial condition and results of operations.

 

If we fail to innovate and utilize modern agricultural technologies and techniques to enhance production and yields of our acquired agricultural properties, we may be adversely affected.

 

Our business model is focused on our acquiring underdeveloped or underutilized agricultural properties and improving them by applying evolving agricultural technologies and techniques. Therefore, our strategy depends to a large extent on our ability to obtain and apply modern agricultural techniques and technologies to enhance the value of the properties we acquire. If we are unable to apply in a timely manner the most advanced technologies and farming techniques required to add value to our agricultural properties and make our products competitive and attractive to local and international investors, our business, financial condition and results of operations would be adversely affected.

 

We may experience difficulties implementing our investment projects, which may affect our growth prospects.

 

Part of our strategy with regard to our agricultural properties consists of investing in support infrastructure in order to increase the value of such agricultural properties. In implementing our investment projects, we may face a number of challenges, including: (i) failures or delays in acquiring necessary equipment or services; (ii) higher costs than those originally estimated; (iii) difficulties securing the necessary environmental and government licenses; (iv) changes in market conditions, which could render the projects less profitable than originally estimated; (v) impossibility or delays in acquiring land at attractive prices, or an increase in the land prices on account of growing demand for land by our competitors; (vi) impossibility of, and delay in identifying and acquiring land that is in compliance with Brazilian real estate property laws; (vii) lack of capacity to develop infrastructure and attract qualified labor on a timely and efficient basis; (viii) disputes and litigation relating to the land we acquire; (ix) cultural challenges deriving from the integration of new management and employees in our organization; and (x) the need to update accounting systems, administrative data and human resources. Our inability to manage these risks would adversely affect us.

  

Property values in Brazil could decline significantly.

 

Real estate property values in Brazil are influenced by a wide variety of factors beyond our control, and therefore we cannot assure you that property values will continue to increase or that property values will not decline. A significant decline in property values in Brazil could adversely affect the value of our property holdings.

 

Our growth depends on our ability to attract and retain qualified personnel.

 

We are highly dependent on the services of our technical and administrative staff. If we lose any of our senior management, or require additional management personnel, we will have to attract similarly qualified administrative and technical personnel. There is significant demand for high-level, technical personnel with the skills and know-how required to operate our business, and we compete for this talent in the global market. The availability of attractive opportunities in Brazil and other countries may adversely affect our ability to hire or retain highly-qualified personnel. If we fail to attract and retain the professionals we need to expand and manage our operations, our business may be materially and adversely affected.

 

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Adverse weather conditions may have an adverse impact on our agricultural properties and products and, to a lesser extent, our cattle production.

 

The occurrence of severe weather conditions, including droughts, floods, heavy rainfall, hail, frost or extremely high temperatures is unpredictable and has had and could have in the future a potentially devastating impact on our agricultural properties or production and, to a lesser extent, our cattle production. Adverse weather conditions may be exacerbated by the effects of climate change. In recent years, different regions in Brazil have been affected by extreme weather conditions, and the regions where our properties are located have also experienced high temperatures and severe drought in recent years. The effect of severe weather conditions may materially reduce the productivity of our farms, impairing our revenue and cash flow, and requiring higher levels of investment or significant increases in our operating costs, any of which could have a material and adverse impact on us.

 

Diseases may affect our crops and cattle, potentially destroying all or part of our production.

 

The occurrence and effect of diseases can be unpredictable and devastating on crops, potentially rendering useless all or a significant portion of the affected crops. The cost of preventing and treating crop disease tends to be high. For example, diseases, such as Asian soybean rust (Phakopsora pachyrhizi) and pests, like corn earworm (Helicoverpa zea) and cotton bollworm (Helicoverpa armigera), can spread and may result in lower crop yields and higher operating costs. Currently, Asian soybean rust, corn earworm and cotton bollworm can only be controlled, not eliminated.

 

Diseases affecting our cattle herds, such as tuberculosis, brucellosis and foot-and-mouth disease, can render cows unable to produce meat for human consumption. Outbreaks of cattle diseases may also result in the closure of certain important markets for our cattle products, such as the United States. Although we abide by national veterinary health guidelines, which include laboratory analyses and vaccination, to control diseases among the herds, especially foot-and-mouth disease, we cannot assure that future outbreaks of cattle diseases will not occur. A future outbreak of diseases among our cattle herds may adversely affect our cattle sales which could adversely affect our financial condition and results of operation.

 

The origination and spread of diseases may occur for many reasons beyond our control, including the failure of other producers to comply with applicable health and environmental regulations. The appearance of new diseases or the mutation or proliferation of existing diseases could damage or completely destroy our crops and cattle herds, which would materially and adversely affect our business, financial condition and results of operations.

 

Fires and other accidents may affect our agricultural properties and adversely affect us.

 

Our operations are subject to various risks affecting our agricultural properties and agricultural installations, including destruction of farms and crops by fire and other natural disasters or events, and theft or other unexpected loss of grains or fertilizers and supplies. We could be materially and adversely affected if any of these risks were to occur.

 

Widespread uncertainties and fraud involving ownership of real estate in Brazil may adversely affect us.

 

Under Brazilian law, ownership of real estate is conveyed only upon proper registration and filing of the relevant public deeds with the Real Estate Registry Office with jurisdiction where the property is located. In certain locations in Brazil, it is frequent to come across real estate registry errors, including duplicate or fraudulent certificates of enrollment and legal challenges. Lawsuits concerning the lawful title of real estate are prevalent in Brazil and, as a result, there is a risk that such errors, fraud or challenges adversely affect our business, financial condition and results of operations, thereby causing the loss of all or substantially all of our agricultural properties.

 

We depend on international trade and economic and other conditions in our key export markets.

 

Brazil’s current agricultural production capacity is greater than the demands of its domestic agricultural market. Agriculture exports account for an increasingly significant portion of our revenue, especially as our rehabilitated farm properties gain crop production capabilities and increased yield. Therefore, our results of operations increasingly depend on political, economic and regulatory conditions in our principal export markets. The ability of our products to effectively compete in these export markets may be adversely affected by a number of factors beyond our control, including the deterioration of macroeconomic conditions, the volatility of exchange rates, the imposition of tariffs or other trade barriers or other factors in those markets such as regulations relating to the chemical content of agricultural products and safety and health regulations.

 

 13 

 

 

Due to the growing market share of Brazilian agricultural and beef products in the international markets, Brazilian exporters are increasingly being affected by tariffs and other barriers imposed by importing countries, in order to, among other things, protect local producers by limiting access of Brazilian companies to their markets. For example, the European Union imposes protective tariffs designed to mitigate the effects of Brazil’s lower production costs on local European producers. Developed countries also use direct and indirect subsidies to enhance the competitiveness of their producers in other markets.

 

Additionally, due to the ongoing COVID-19 pandemic, governments and other authorities have established certain restrictions on the freedom of movement of individuals and business operations, including travel bans, which led to supply chain disruptions and border closures. Other measures, such as the restriction on imports or closures of ports, airports or any ports of entry, or border closures may have a material adverse effect on our business and results of operations. See “—We may be exposed to risks related to health epidemics and pandemics, such as the COVID-19 pandemic, which could adversely affect our business and results of operations.”

 

The adoption of measures by a given country or region, such as restrictions, import quotas or suspension of imports could substantially affect the export volume of agricultural products and, consequently, our results of operations.

 

In July 2018, the U.S. and China began imposing tariffs on approximately $34 billion of each other’s exports. Subsequently, the U.S. imposed tariffs on an additional $216 billion in Chinese goods, and China imposed tariffs on an additional $76 billion worth of U.S goods. Negotiations to resolve the trade dispute are currently ongoing. Continued global trade tensions may lead to the imposition of further tariffs or other future geopolitical economic developments. Future actions of the U.S. administration or other countries, including China, with respect to tariffs or international trade agreements and policies remain currently unclear. We are unable at this time to predict the outcome of the trade tensions between the United States and China. The escalation of such trade tensions between the United States and China, and the imposition of tariffs, retaliatory tariffs or other trade restrictions may result in a rebalancing of global export flows in our key export markets and an increase in global competition, which in turn could adversely affect our business, financial condition and results of operations.

 

If the competitiveness of our products in one or more of our significant markets were to be affected by any one of these events, we may not be able to reallocate our products to other markets on comparable terms, which could therefore adversely affect our business, financial condition and results of operations.

 

A worldwide economic downturn could weaken demand for our products and lead to lower prices.

 

Demand for our products may be affected by international, national and local economic conditions that are beyond our control. Adverse changes in the perceived or actual economic conditions, such as higher fuel prices, higher interest rates, stock and real estate market declines and associated volatility, more restrictive credit markets, higher taxes, and changes in governmental policies could reduce the level of demand for, or the prices of, our products. We cannot predict the duration or magnitude of a downturn or the timing or strength of economic recovery following the adverse effects of the COVID-19 pandemic. If a downturn were to continue for an extended period of time or worsen, we could experience a prolonged period of decreased demand and prices. In addition, economic downturns may adversely impact our suppliers, which can result in disruptions to our operations and financial losses. Moreover, the deterioration of global economic conditions, particularly in relevant economies, such as the United States, China and Europe, as a result of the COVID-19 pandemic, may ultimately decrease the demand for our products and have a material adverse effect on our financial condition and results of operations. See “—We may be exposed to risks related to health epidemics and pandemics, such as the COVID-19 pandemic, which could adversely affect our business and results of operations.”

 

Fluctuations in the value of the Brazilian real in relation to the U.S. dollar could adversely affect us.

 

Foreign exchange fluctuations, particularly of the Brazilian real against the U.S. dollar, may significantly affect our results of operations given that: (1) our products and the basic supplies used in our production are traded internationally; (2) soybean prices are defined based on prices prevalent on the Chicago Board of Trade, or CBOT; and (3) most markets are served by several suppliers from different countries, and competitiveness of farm products abroad may increase in relation to ours in light of the appreciation of the Brazilian currency in relation to the U.S. dollar. Fluctuations in the value of the real in relation to the U.S. dollar could impact our export revenue, our sales in U.S. dollars in the Brazilian market and our financial expenses and operating costs, which may adversely affect our business, financial condition and results of operations.

   

The real has suffered frequent depreciations and appreciations in relation to the U.S. dollar and other foreign currencies during the past decade. The Brazilian government has in the past utilized different exchange rate regimes, including sudden devaluations, periodic mini devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. Since 1999, Brazil has adopted a floating exchange rate system with interventions by the Central Bank in buying or selling foreign currency. From time to time, there have been significant fluctuations in the exchange rate between the Brazilian real and the U.S. dollar and other currencies. The devaluations in more recent periods resulted in significant fluctuations in the exchange rates of the real against the U.S. dollar and other currencies.

 

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In 2017, the real depreciated by 1.5% against the U.S. dollar, and the real/U.S. dollar exchange rate was R$3.3080 on December 31, 2017. In 2018, the real depreciated by 17.1% against the U.S. dollar, and on December 31, 2018, the real/U.S. dollar exchange rate was R$3.8748. In 2019, the real depreciated by 0.6% against the U.S. dollar, and on December 31, 2019, the real/U.S. dollar exchange rate was R$4.0307. On September 30, 2020, the real/U.S. dollar exchange rate was R$5.6407 per US$1.00. There can be no assurance that the real will not depreciate or appreciate against the U.S. dollar in the future.

 

We also hold derivative financial instruments to hedge risks relating to revenue from exports and operating costs denominated in foreign currencies. If we fail to manage these instruments properly, we may be adversely affected by our exposure to these risks, which may have a material adverse effect on our financial condition and results of operations.

 

Our business is seasonal, and our revenue may fluctuate significantly depending on the growing cycle of our crops.

 

Agribusiness operations are predominantly seasonal in nature. In Brazil, the harvest of soybean and corn generally occurs from February to June. The annual sugarcane harvest period in Brazil normally begins in April and ends in November of each year. Therefore, our results of operations are likely to continue to significantly fluctuate between the planting and harvest periods of each crop, which cause fluctuations in our cash flows as a result of disparities between our revenue stream and our fixed expenses. In addition, seasonality creates limited windows of opportunity for our producers to complete required tasks at each stage of crop cultivation. Should events such as adverse weather conditions (including deluges of rain as has recently been the case throughout Brazil) or transportation interruptions occur during these seasonal windows, we may face reduced revenue without an opportunity to recover until the following crop’s planting. Finally, because of the effects of seasonality, our quarterly results may not be indicative of our annual results.

 

Our growth plan will require additional capital, which may not be available on terms and conditions acceptable to us, or at all.

 

Our operations require a significant amount of capital. We may need to seek additional capital by issuing shares or debt instruments, or by incurring indebtedness. Our ability to raise capital will depend on our future profitability, which is currently uncertain, and on political and economic conditions in Brazil and the international agricultural and real estate markets. Depending on these and other factors, many of which are beyond our control, additional capital may not be available at all or on conditions that are favorable or acceptable to us. If we are required to finance our activities through indebtedness, it is likely that the terms of that debt will impose upon us obligations or covenants, financial or otherwise, that could restrict our operational flexibility. Should we fail to raise additional capital under conditions that are acceptable to us, our business, financial condition and results of operations could be adversely affected.

 

We plan to continue to use financial derivative instruments, which may result in substantial losses.

 

We plan to continue to use derivative financial instruments, mainly commodity hedge derivatives, foreign exchange derivatives and exchange rate swaps. If we enter into such hedging agreements and future prices of the underlying commodities differ from our expectations, we may incur substantial losses which could have an adverse effect on our financial condition and results of operations.

 

Furthermore, our hedging strategies may not properly take account of the effects of foreign exchange or commodity variations on our financial position. On entering into forward exchange and commodity agreements, we will be subject to the risk that our counterparties could fail to meet the conditions of such agreements. We may not be able to receive compensation for losses and damages from any defaulting counterparty through legal remedies, on account of laws protecting against bankruptcy or other similar protections for insolvent debtors, foreign laws restricting cross-border legal remedies, or for other reasons, which may adversely affect our business, financial condition and results of operations.

  

We may not be successful in our future partnerships and strategic relationships.

 

We have entered into strategic partnerships and alliances in order to benefit from certain business opportunities. We cannot predict if such strategic partnerships and alliances will be successful or if more partnerships and alliances will take place. Our ability to successfully expand our business by means of strategic partnerships and alliances depends on various factors, including our ability to negotiate favorable conditions for such partnerships and alliances, in addition to factors beyond our control, such as our partners’ compliance with obligations arising from the partnership. Furthermore, our expectations regarding the benefits of these partnerships may not materialize. If we are unable to develop successful strategic partnerships and alliances, we could also be adversely affected.

 

 15 

 

 

Cresud, our controlling shareholder, and certain members of our board of directors may have interests that differ from those of our other shareholders.

 

As of September 30, 2020, Cresud held 32.06% of our common shares. Cresud has other numerous investments and may have other priorities that may conflict with those of our other shareholders, and as a result thereof, significant conflicts of interest may arise between Cresud and our other shareholders. In addition, five of our nine directors have been nominated by Cresud and certain members of our management, including our Chief Administrative Officer and Investor Relation Officer, were previously employed by Cresud. This situation may give rise to actual or apparent conflicts of interest as such directors and officers may have fiduciary duties or other interests owed to both us and Cresud or any of its affiliates. It may also limit the ability of such directors and officers to participate in certain matters.

 

In addition, as a result of Cresud’s ownership interest in us, conflicts of interest could arise with respect to transactions involving our ongoing business activities, and the resolution of these conflicts may not be favorable to us. Specifically, business opportunities, including but not limited to potential targets for rural property acquisitions, may be attractive to both Cresud and us. We may not be able to resolve any potential conflicts and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.

  

Increases in the price of raw materials and oil may adversely affect us.

 

Our agricultural properties are located in Brazil’s savannah region, a location where the soil is mostly acidic and not very fertile, requiring the use of lime and fertilizers. Our operations require other raw materials such as pesticides and seeds which we acquire from local and international suppliers. We do not have long-term supply contracts for these raw materials and therefore are exposed to the risk of cost increases. A significant increase in the price of lime, fertilizers or other raw materials we use would likely reduce our profitability or otherwise adversely affect our business operations as these are not costs that can readily be passed on to our customers. In addition, certain of our production costs, including fertilizers and the cost of leasing agricultural machinery, are linked to the international price of oil and its derivatives. Therefore, if the price of oil increases significantly, our results of operations could be adversely affected.

 

Delays or failures in the delivery of raw materials used by us and our suppliers could have an adverse effect on us.

 

We depend on suppliers to provide us with fertilizers, seeds, other raw materials and machinery services. Possible delays in the delivery of such items may delay our planting efforts until we are able to establish agreements with other suppliers, or may delay our harvest in case of delay in delivery of machinery. Accordingly, any delays, failures or defects in the delivery of raw materials or inputs or with regard to the provision of services to us by our suppliers could adversely affect our business and results of operations. See “—Lack of transportation, storage and processing infrastructure in Brazil represents an important challenge for the Brazilian agricultural and agricultural real estate sectors.”

 

Certain of our agricultural products contain genetically modified organisms (GMOs), and risks associated with GMOs remain uncertain.

 

The totality of our products, including soybean and corn, contain genetically modified organisms, or GMOs in varying proportions depending on the crop year. Production and consumption of GMOs remain controversial, and adverse publicity and consumer resistance have led to the adoption of certain governmental regulations limiting sales of GMO products in important markets including the European Union. If GMOs were determined to present risks to human health or to the environment, demand for our GMO products could collapse, and we could face potentially significant liability for harm caused by such products, all of which could materially and adversely affect our business, financial condition and results of operations.

 

In 2018, a Brazilian trial court ruled that new products containing “glyphosate” – a herbicide widely used in soybeans and others crops – were prohibited from being registered in Brazil, and existing registrations would be suspended until the government reevaluates their toxicity. This decision also suspended the registration of others chemicals, such as the insecticide abamectin and the fungicide thiram. According to the Brazilian Agriculture Minister, this decision would be a disaster for the agricultural industry and, for this reason, the decision was subject to multiple appeals. On September 3, 2018, a court of appeals reversed the trial court’s decision. Currently, the use of glyphosate is permitted. However, we are unable to guarantee that it will continue to be allowed.

 

The prohibition of the use of glyphosate to control weed infestation could compromise no-till farming, which is important for productivity and sustainability, and lead to increased use of other products for pest control. Currently, there is no alternative in Brazil to replace glyphosate. Similar products have a high cost and are not readily available to meet the demand for glyphosate. As a result, our production costs could increase, and our productivity could be significantly impacted, which could result in lower production margins.

 

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Lack of transportation, storage and processing infrastructure in Brazil represents an important challenge for the Brazilian agricultural and agricultural real estate sectors.

 

We depend on efficient access to transportation and port infrastructure for the growth of Brazilian agriculture and our operations. We may decide to acquire agricultural properties in areas where existing transportation infrastructure is inadequate and where improvements may be required to make our agricultural production more accessible to export centers at competitive prices. A substantial portion of Brazilian agricultural production is currently transported by trucks, which is significantly more expensive than transportation by rail cars. Given that our dependence on road transportation prevents us from being considered a low-cost producer, our ability to compete on the world market may be impaired, especially as the price of fuel increases. As a result, we may not be able to secure efficient transportation for our production to reach major markets in a cost-efficient manner or at all, which may adversely affect our business, financial condition and results of operations.

 

In addition, as recently as May 2018, Brazil faced a widespread truck drivers’ strike, which caused a nationwide transportation paralysis, highway blockades, cargo delays, shortages of food, supplies and fuel in Brazil. If a widespread strike or similar disruptive event happens again, it could adversely affect the logistics sector as whole and our business, financial condition and results of operations.

 

Disruptions may also be caused by the spread of infectious disease, such as COVID-19, or by a deterioration in labor or union relations, disputes or work stoppages or other labor-related developments affecting us and our suppliers and distributors. See “—We may be exposed to risks related to health epidemics and pandemics, such as the COVID-19 pandemic, which could adversely affect our business and results of operations.”

 

Competition in the markets for our products may affect us.

 

We face significant domestic and international competition in each of our markets and in many of our production lines. The global market for agricultural products is highly competitive and sensitive to changes in industrial capacity, product inventories and cyclical changes in the world economy, any one or more of which may affect to a significant degree the selling price of our products and therefore our profitability. Since many of our products are agricultural commodities, such products compete in international markets almost exclusively based on price. Many other producers of such commodities are larger than us and have more significant financial and other resources. Furthermore, many other producers receive subsidies in their respective countries that generally are not available in Brazil. Such subsidies may afford producers lower production costs or enable them to operate in an environment with sharp price reductions, constrained margins and operating losses for longer periods. Any increased competitive pressure with respect to our products could materially and adversely affect our business, financial condition and results of operations.

 

Social movements may affect the use of our agricultural properties or cause damage to them.

 

Social movements such as the Landless Rural Workers’ Movement (Movimento dos Trabalhadores Rurais Sem Terra) and the Pastoral Land Commission (Comissão Pastoral da Terra) are active in Brazil and advocate land reform and property redistribution by the Brazilian government.

 

Invasion and occupation of agricultural land by large numbers of people is a common practice among the members of such movements and, in certain regions, including those where we currently invest, remedies such as police protection or eviction procedures are inadequate or non-existent. As a result, we cannot assure you that our agricultural properties will not be subject to invasion or occupation by any social movement. Any invasion or occupation may materially impair the use of our lands and adversely affect our business, financial condition and results of operations.

 

We made investments in farmland in Paraguay, and we may possibly make investments in other countries in and outside Latin America, in which case we would be subject to the associated economic, legal, political and regulatory risks.

 

Currently, we conduct our activities in Brazil and Paraguay. We are considering expanding into other countries in and outside Latin America, but currently have no definitive commitments or specific plans with respect thereto. In the future, we may expand our activities into other countries in Latin America or elsewhere if we decide that international expansion would be appropriate to achieve our objectives. The success in other countries of our business strategy and business model that we apply in Brazil would be subject to a high level of uncertainty and depend on numerous factors beyond our control. Therefore, we cannot assure you that any such expansion would be profitable or enable us to obtain the expected returns on our investments, or even recover our investments. Any international expansion of our activities would be subject to political, economic and regulatory risks in the relevant country and to risks inherent to the management of a transnational company, including:

 

  ● challenges posed by distance, language, local business practices and cultural differences (i.e. lack of financing; longer payment cycles in the relevant country; difficulties in forming partnerships or strategic alliances with local parties; conflicting or redundant practices in respect to tax, regulatory, legal and administrative aspects);

 

  ● negative effects of currency fluctuations or the imposition of exchange controls or restrictions on repatriation of capital;

 

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  ● adverse changes in laws and local policies, particularly those relating to import tariffs, labor practices, environment, investment, acquisition of agricultural property by foreign companies or companies controlled by foreigners;

 

  ● difficulty of enforcement of contracts and collection or enforcement of debts, or difficulties or restrictions imposed by local courts;

 

  ● expropriation and imposition of legal or administrative limitations to the exercise of property rights as a result of changes in laws or applicable regulations;

 

  ● difficulty in obtaining licenses, permits or other approvals from local government authorities;

 

  ● political disputes, social unrest and deteriorating local economic conditions;

 

  ● transnational conflicts or disputes involving Brazil and the relevant country; and

 

  ● terrorism or military conflicts; and natural disasters, epidemics, riots and insurrections.

  

Our inability to recognize and respond to these differences, challenges and risks could adversely affect any operations we may undertake in markets outside of Brazil, which could have a material adverse effect on our business, financial condition and results of operations.

 

Unauthorized disclosure, or loss of intellectual property or other sensitive business or personal information, or disruption in information technology by cyber-attacks, as well as our failure to comply with existing and future laws and regulations relating to data privacy and data security can subject us to penalties or liability and can adversely impact our operations, reputation and financial results.

 

We collect, store, process and use certain confidential information and other user data in connection with our business operations. We must ensure that any processing, collection, use, storage, dissemination, transfer and disposal of data for which we are responsible complies with relevant data protection and privacy laws. We rely on commercially available systems, software, tools and monitoring to provide secure processing, transmission and storage of confidential information, such as customer, employee, company and other personal information.

 

Data protection and privacy laws are developing to take into account the changes in cultural and consumer attitudes towards the protection of personal data. For example, on August 14, 2018, Brazil enacted Law No. 13,709/2018 (Lei Geral de Proteção de Dados, or the LGPD), a comprehensive data protection law establishing general principles and obligations that apply across multiple economic sectors and contractual relationships. The LGPD establishes detailed rules for the collection, use, processing and storage of personal data and will affect all economic sectors, including the relationship between customers and suppliers of goods and services, employers and employees, and other relationships in which personal data is collected, whether in a digital or physical manner. The LGPD entered into force on September 18, 2020, but the imposition of penalties pursuant to it remains suspended until August 2021.

 

As we seek to expand our business and operations, we expect that we will be increasingly subject to laws and regulations relating to the collection, use, retention, security, and transfer of information, including the personally identifiable information of our employees and customers. These laws and regulations may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that will materially and adversely affect our business. If there are breaches of the LGPD obligations, or of other data privacy laws and regulations, as the case may be, we could face significant administrative and monetary sanctions as well as reputational damage, which could have a material adverse effect on our operations, financial condition and prospects.

 

In addition, despite the security measures that we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events.

 

See also “—We were the target of a cybersecurity incident that disrupted our systems”.

 

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We were the target of a cybersecurity incident that disrupted our systems.

 

In October 2019, we experienced a cybersecurity incident, in which certain of our network and computer systems and data became temporarily unavailable. We have no reason to believe that such incident resulted in the unauthorized disclosure of confidential information. Any security incident, or any perceived failure involving the misappropriation, loss or other unauthorized disclosure of confidential information, as well as any failure or perceived failure to comply with laws, policies, legal obligations or industry standards regarding data privacy and protection, whether by us or our service providers, could damage our reputation, expose us to litigation risk and liability, subject us to negative publicity, disrupt our operations and harm our business. We cannot assure you that our security measures, or those put in place by our service providers, will be sufficient to prevent future security breaches or incidents, which may directly or indirectly affect us, or that our failure to prevent them will not have a material adverse effect on our business, results of operations or financial condition.

  

Cyber-attacks or security breaches could compromise confidential, business and other critical information, cause a disruption in our operations or harm our reputation, as certain of our operations are dependent on information technology and telecommunication systems and services. Information assets, including intellectual property, personal data and other business-sensitive critical information are an attractive asset to cyber criminals, cyberterrorism or other external agents. A significant cyber-attack, a human error, including from our employees and partners, or obsolescence of technology could result in the loss of critical business information and adversely affect our operations and results of operations.

 

We continuously monitor and develop our information technology networks and infrastructure. We also conduct annual tests to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a material impact on us. However, we cannot assure you that these measures will be effective in protecting us against future cyberattacks and other related breaches of our information technology systems.

 

Our risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As cyber threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities that are discovered in the future. In addition, cyber-attacks could result in important remediation costs, increased cyber security costs, lost revenues due to disruption of activities, litigation and reputational harm affecting customer and investor confidence, which ultimately could materially adversely affect our business, financial condition and results of operations.

 

Risks Relating to Brazil

 

The measures taken or to be implemented by the Brazilian government in response to the COVID-19 pandemic may have an adverse effect on our business and operations.

 

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Brazilian federal, state and municipal governments and other authorities have adopted a number of measures to adress the potential impacts of the COVID-19 pandemic, including:

 

●to contain or delay the spread of COVID-19, the Brazilian Ministry of Health (Ministério da Saúde), as well as several state and municipal authorities have adopted or recommended social distancing measures;

 

●in March 2020, the Brazilian federal government created a Crisis Committee to Monitor the Impacts of COVID-19 in Brazil. Since then, it has announced several measures to adress the effects of the COVID-19 pandemic in Brazil

 

●the Brazilian National Congress has held discussions regarding several measures to increase the Brazilian government’s revenues, such as imposing new taxes, revoking tax benefits and increasing the rates of current taxes; and

 

●a revision of tax benefits and increase of the rates of current taxes;

 

It is also possible that our commercial agreements, including rural partnership agreements, could be affected by the adverse impacts derived from the COVID-19 pandemic, since the parties thereto may be unable to comply with their contractual obligations. The COVID-19 pandemic would most likely be considered as an act of God or force majeure event by Brazilian courts. If our agreements are litigated, parties thereto could try to justify nonperformance and request: (i) termination without penalties; (ii) adjustment or release from contractual obligations; (iii) adjustment or release from the effects of arrears; and (iv) adjustment or release from penalties for breach of contract, which, could have a material adverse effect on our business and operations.

 

In addition, there is considerable uncertainty regarding the possible outcomes of the COVID-19 pandemic. We cannot predict what other measures will be implemented to mitigate the impacts of COVID-19 and whether they will lead to restrictions or limitations that could affect our business operations. The deterioration of global economic conditions as a result of the COVID-19 pandemic may decrease demand for our products and have a material adverse effect on our business, financial condition and results of operations. The COVID-19 pandemic may also heighten several of the other risk factors described in this annual report.

 

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The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy, which, together with Brazilian political and economic conditions, may adversely affect us.

 

We may be adversely affected by the following factors, as well as the Brazilian federal government’s response to these factors:

 

  ● economic and social instability;

 

  ● increase in interest rates;

 

  ● exchange controls and restrictions on remittances abroad;

 

  ● restrictions and taxes on agricultural exports;

 

  ● exchange rate fluctuations;

 

  ● inflation;

 

  ● volatility and liquidity in domestic capital and credit markets;

 

  ● expansion or contraction of the Brazilian economy, as measured by GDP growth rates;

 

  ● allegations of corruption against political parties, elected officials or other public officials, including allegations made in relation to the Lava Jato investigation;

 

  ●

government measures aimed at controlling the COVID-19 pandemic;

 

  ● government policies related to our sector; and

 

  ● fiscal or monetary policy and amendments to tax legislation; and other political, diplomatic, social or economic developments in or affecting Brazil.

 

Historically, the Brazilian government has frequently intervened in the Brazilian economy and has occasionally made significant changes in economic policies and regulations, including, among others, the enactment of new tax laws, changes in monetary, fiscal and tax policies, currency devaluations, capital controls and limits on imports.

 

The Brazilian economy has been experiencing a slowdown. The Brazilian GDP decreased 3.6% in 2016, increased 1.0% in 2017, increased 1.1% in 2018, increased 1.1% in 2019 and decreased 5.9% in the first six months of 2020.

 

Inflation, unemployment and interest rates have increased more recently, and the Brazilian real has weakened significantly in relation to the U.S. dollar. The market expectations for 2020 are that the Brazilian economy will experience a severe slowdown and Brazilian GDP will decrease, as a consequence of the COVID-19 pandemic. Adverse economic conditions in Brazil may materially and adversely affect our business, financial condition and results of operations.

 

As a result of investigations carried out in connection with the Lava Jato (Car Wash) operation into corruption in Brazil, a number of senior politicians, including congressmen, and executive officers of certain of the major state-owned companies in Brazil have resigned or been arrested, while others are being investigated for allegations of unethical and illegal conduct. The matters that have come, and may continue to come, to light as a result of, or in connection with, the Lava Jato operation and other similar operations have adversely affected, and we expect that they will continue to adversely affect, the Brazilian economy, markets and trading prices of securities issued by Brazilian issuers in the near future.

 

The ultimate outcome of these investigations is uncertain, but they have already had an adverse effect on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy, the political environment and the Brazilian capital markets. The development of these investigations has affected and may continue to adversely affect us. We cannot predict if these investigations will bring further political or economic instability to Brazil, or if new allegations will be raised against high-level members of the Brazilian federal government. In addition, we cannot predict the results of these investigations, nor their effects on the Brazilian economy.

 

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The ongoing economic uncertainty and political instability in Brazil may adversely affect the Brazilian economy, our business, and the market price of our shares and ADSs.

 

Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.

 

In recent years, there has been significant political turmoil in connection with the impeachment of the former president (who was removed from office in August 2016) and ongoing investigations of her successor (who left office in January 2019) as part of the ongoing “Lava Jato” investigations. Presidential elections were held in Brazil in October 2018. We cannot predict which policies the new President of Brazil, who assumed office on January 1, 2019, may adopt or change during his mandate or the effect that any such policies might have on our business and on the Brazilian economy. Any such new policies or changes to current policies may have a material adverse effect on us. The political uncertainty resulting from the presidential elections and the transition to a new government may have an adverse effect on our business, results of operations and financial condition and the price of our shares and ADSs.

 

Furthermore, Brazil’s federal budget has been in deficit since 2014. Similarly, the governments of Brazil’s constituent states are also facing fiscal concerns due to their high debt burdens, declining revenues and inflexible expenditures. While the Brazilian Congress has approved a ceiling on government spending that will limit primary public expenditure growth to the prior year’s inflation for a period of at least 10 years, local and foreign investors believe that fiscal reforms, and in particular a reform of Brazil’s pension system, will be critical for Brazil to comply with the spending limit. As of the date of this annual report, discussions in the Brazilian Congress relating to such reforms remain ongoing. Diminished confidence in the Brazilian government’s budgetary condition and fiscal stance could result in downgrades of Brazil’s sovereign debt by credit rating agencies, negatively impact Brazil’s economy, lead to further depreciation of the real and an increase in inflation and interest rates, thus adversely affecting our business, results of operations and financial condition.

 

Uncertainty about the Brazilian government’s implementation of changes in policies or regulations that affect such implementation may contribute to economic instability in Brazil and increase the volatility of securities issued abroad by Brazilian companies, including our securities. Any of the above factors may create additional political uncertainty, adversely affect the Brazilian economy, our business, financial condition, results of operations and the market price of our shares and ADSs. 

 

Inflation, coupled with the Brazilian government’s measures to fight inflation, may hinder Brazilian economic growth and increase interest rates, which could have a material adverse effect on us.

 

Brazil has in the past experienced significantly high rates of inflation. As a result, the Brazilian government adopted monetary policies that resulted in Brazilian interest rates being among the highest in the world. The Central Bank’s Monetary Policy Committee (Comitê de Política Monetária do Banco Central, or COPOM), establishes an official interest rate target for the Brazilian financial system based on the level of economic growth, inflation rate and other economic indicators in Brazil. Between 2004 and 2010, the official Brazilian interest rate varied from 19.75% to 8.75% per year. In response to an increase in inflation in 2010, the Brazilian government increased the official Brazilian interest rate, the SELIC rate, which was 10.75% per year as or December 31, 2010. The SELIC rate has increased and decreased since then and, as of June 30, 2019, it was 6.50% per year. The inflation rates, as measured by the General Market Price Index (Índice Geral de Preços–Mercado), or IGP-M, and calculated by Fundação Getúlio Vargas, or FGV, were 7.18% in 2016, (0.52)% in 2017, 7.54% in 2018 and 7.30% in 2019. Cumulative inflation in the first six months of 2020, calculated by the same index, was 4.39%.

 

Inflation and the government measures to fight inflation have had and may continue to have significant effects on the Brazilian economy and our business. In addition, the Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and slowing economic growth. On the other hand, an easing of monetary policies of the Brazilian government may trigger increases in inflation. In the event of an increase in inflation, we may not be able to adjust our daily rates to offset the effects of inflation on our cost structure, which may materially and adversely affect us.

 

An increase in interest rates may have a significant adverse effect on us. In addition, as of June 30, 2020, certain of our loans were subject to interest rate fluctuations, such as the Brazilian long-term interest rate (Taxa de Juros de Longo Prazo, or TJLP), and the interbank deposit rate (Certificados de Depósitos Interbancários), or CDI. In the event of an abrupt increase in interest rates, our ability to comply with our financial obligations may be materially and adversely affected.

 

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A deterioration in general economic and market conditions or the perception of risk in other countries, principally in emerging countries or the United States, may have a negative impact on the Brazilian economy and us.

 

Economic and market conditions in other countries, including United States and Latin American and other emerging market countries, may affect the Brazilian economy and the market for securities issued by Brazilian companies. Although economic conditions in these countries may differ significantly from those in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. Crises in other emerging market countries could dampen investor enthusiasm for securities of Brazilian issuers, including ours, which could adversely affect the market price of our common shares. In the past, the adverse development of economic conditions in emerging markets resulted in a significant flow of funds out of the country and a decrease in the quantity of foreign capital invested in Brazil. Changes in the prices of securities of public companies, lack of available credit, reductions in spending, general slowdown of the global economy, exchange rate instability and inflationary pressure may adversely affect, directly or indirectly, the Brazilian economy and securities market. Global economic downturns and related instability in the international financial system have had, and may continue to have, a negative effect on economic growth in Brazil. Global economic downturns reduce the availability of liquidity and credit to fund the continuation and expansion of business operations worldwide.

 

In addition, the Brazilian economy is affected by international economic and market conditions generally, especially economic conditions in the United States. Share prices on B3 S.A. – Brasil, Bolsa, Balcão, or B3, for example, have historically been sensitive to fluctuations in U.S. interest rates and the behavior of the major U.S. stock indexes. An increase in interest rates in other countries, especially the United States, may reduce global liquidity and investors’ interest in the Brazilian capital markets, adversely affecting the price of our common shares.

 

Risks Relating to our American Depositary Shares and Common Shares

 

A holder of our American Depositary Shares may face disadvantages compared to a holder of our common shares when attempting to exercise voting rights.

 

Holders of our American Depositary Shares, or ADSs, may instruct the depositary to vote the common shares underlying the ADSs. For the depositary to follow the voting instructions, it must receive them on or before the date specified in our voting materials. The depositary must try, as far as practical, subject to Brazilian law and our articles of association, to vote the common shares as instructed. In most cases, if the ADS holder does not give instructions to the depositary, it may vote the common shares in favor of proposals supported by our board of directors, or, when practicable and permitted, give a discretionary proxy to a person designated by us. We cannot be certain that ADS holders will receive voting materials in time to ensure that they can instruct the depositary to vote the underlying common shares. Also, the depositary is not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that ADS holders may not be able to exercise their right to vote and there may be nothing they can do if their common shares or other deposited securities are not voted as requested.

  

Holders of our common shares or ADSs may not receive any dividends or interest on shareholders’ equity.

 

According to our bylaws, we must pay our shareholders at least 25% of our annual net income as dividends or interest on shareholders’ equity, as calculated and adjusted under Brazilian corporate law. This adjusted net income may be capitalized, used to absorb losses or otherwise retained as allowed under Brazilian corporate law and may not be available to be paid as dividends or interest on shareholders’ equity.

 

Additionally, Brazilian corporate law allows a publicly-traded company like ours to suspend the mandatory distribution of dividends in any particular year if our board of directors informs our shareholders that such distributions would be inadvisable in view of our financial condition or cash availability. Holders of our common shares or ADSs may not receive any dividends or interest on shareholders’ equity in any given year if our board of directors makes such a determination or if our operations fail to generate net income.

 

Holders of our common shares or ADSs in the United States may not be entitled to the same preemptive rights as Brazilian shareholders, pursuant to Brazilian law, in the subscription of shares resulting from capital increases made by us.

 

Under Brazilian law, if we issue new shares in exchange for cash or assets as part of a capital increase, subject to certain exceptions, we must grant our shareholders preemptive rights at the time of the subscription of shares, corresponding to their respective interest in our share capital, allowing them to maintain their existing shareholding percentage. We may not legally be permitted to allow holders of our common shares or ADSs in the United States to exercise any preemptive rights in any future capital increase unless (i) we file a registration statement for an offering of shares resulting from the capital increase with the SEC, or (ii) the offering of shares resulting from the capital increase qualifies for an exemption from the registration requirements of the Securities Act. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement for an offering of shares with the SEC and any other factors that we consider important in determining whether to file such a registration statement. We cannot assure the holders of our common shares or ADSs in the United States that we will file a registration statement with the SEC to allow them to participate in any of our capital increases. As a result, the equity interest of such holders in our company may be diluted.

 

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If holders of our ADSs exchange them for common shares, they may risk temporarily losing, or being limited in, the ability to remit foreign currency abroad and certain Brazilian tax advantages.

 

The Brazilian custodian for the common shares underlying our ADSs must obtain an electronic registration number with the Central Bank to allow the depositary to remit U.S. dollars abroad. ADS holders benefit from the electronic certificate of foreign capital registration from the Central Bank obtained by the custodian for the depositary, which permits it to convert dividends and other distributions with respect to the common shares into U.S. dollars and remit the proceeds of such conversion abroad. If holders of our ADSs decide to exchange them for the underlying common shares, they will only be entitled to rely on the custodian’s certificate of registration with the Central Bank for five business days after the date of the exchange. Thereafter, they will be unable to remit U.S. dollars abroad unless they obtain a new electronic certificate of foreign capital registration in connection with the common shares, which may result in expenses and may cause delays in receiving distributions. See “Item 10—Additional Information—Exchange Controls.”

 

Also, if holders of our ADSs that exchange them for our common shares do not qualify under the foreign investment regulations, they will generally be subject to less favorable tax treatment of dividends and distribution on, and the proceeds from any sale of, our common shares. See “Item 10—Additional Information—Exchange Controls” and “Item 10—Additional Information—Taxation—Brazilian Tax Considerations.”

 

Holders of our ADSs may face difficulties in protecting their interests because, as a Brazilian company, we are subject to different corporate rules and regulations and our shareholders may have fewer and less well-defined rights.

 

Holders of our ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our bylaws and Brazilian corporate law.

 

Our corporate affairs are governed by our bylaws and Brazilian corporate law, which differ from the requirements that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. Even if a holder of our ADSs surrenders its ADSs and becomes a direct shareholder, its rights as a holder of our common shares under Brazilian corporate law to protect its interests relative to actions by our board of directors may be fewer and less well-defined than under the laws of those other jurisdictions.

 

Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.

 

We are organized under the laws of Brazil, and certain of our executive officers and our independent registered public accountants reside or are based in Brazil. Most of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of our ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. In addition, because substantially all of our assets and all of our directors and officers reside outside the United States, any judgment obtained in the United States against us or any of our directors or officers may not be collectible within the United States. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions by us or our board of directors or executive officers than would shareholders of a U.S. corporation.

 

In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our common shares and ADSs at a potential disadvantage. Corporate disclosures also may be less complete or informative than those of a public company in the United States or in certain other countries.

 

Our status as a foreign private issuer allows us to follow local corporate governance practices, which may limit the protections afforded to investors.

 

We are a foreign private issuer, as defined by the SEC for purposes of the Exchange Act. As a result, for so long as we remain a foreign private issuer, we will be exempt from most of the corporate governance requirements of stock exchanges located in the United States; accordingly, you will not be provided with the benefits or have the same protections afforded to shareholders of U.S. public companies.

 

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The standards applicable to us are considerably different from the standards applied to U.S. domestic issuers. Although Rule 10A-3 under the Exchange Act generally requires that a listed company have an audit committee of its board of directors composed solely of independent directors, as a foreign private issuer, we are relying on a general exemption from this requirement that is available to us as a result of the features of Brazilian law applicable to our fiscal council. In addition, we are not required to, among other things:

 

  ● have a majority of independent members on our board of directors;

 

  ● have a compensation committee or a nominating/corporate governance committee of our board of directors; and

 

  ● have regularly scheduled executive sessions with only non-management directors; or have at least one executive session of solely independent directors each year.

 

We are an emerging growth company within the meaning of the Exchange Act and, if we decide to take advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.

 

We are an “emerging growth company” within the meaning of the rules under the Exchange Act. We are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with any PCAOB rules, that, if adopted in the future, would require mandatory audit firm rotation and auditor discussion and analysis pursuant to any future audit rule promulgated by the PCAOB (unless the U.S. Securities and Exchange Commission, or the SEC, determines otherwise). In addition, we are not subject to the additional level of review of our internal control over financial reporting as may occur when outside auditors attest as to our internal control over financial reporting. As a result, our stockholders may not have access to certain information they may deem important. We will remain an emerging growth company for up to five years from the date of our initial public offering of securities under an effective registration statement under the Securities Act, though we may cease to be an emerging growth company earlier under certain circumstances.

 

We take advantage of the exemption from the auditor attestation report requirement and may decide to rely on other exemptions in the future. We do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock, and our stock price may be more volatile.

 

Brazilian tax laws may have an adverse impact on the taxes applicable to the disposition of our common shares and ADSs.

 

Under Law No. 10,833/2003, the gain on the disposition or sale of assets located in Brazil by a non-Brazilian resident, whether to another non-Brazilian resident or to a Brazilian resident, may be subject to income tax withholding in Brazil. With respect to the disposition of our common shares, as they are assets located in Brazil, a non-Brazilian resident should be subject to income tax on the gains assessed, regardless of whether the transactions are conducted in Brazil or with a Brazilian resident. With respect to our ADSs, although the matter is not entirely clear, arguably the gains realized by a non-Brazilian resident upon the disposition of ADSs to another non-Brazilian resident will not be taxed in Brazil, on the basis that ADSs are not “assets located in Brazil” for the purposes of Law No. 10,833/2003. We cannot assure you, however, that the Brazilian tax authorities or the Brazilian courts will agree with this interpretation. As a result, gains on a disposition of ADSs by a non-Brazilian resident to a Brazilian resident, or even to a non-Brazilian resident, in the event that courts determine that ADSs would constitute assets located in Brazil, may be subject to income tax in Brazil. See “Item 10—Additional Information—Taxation—Brazilian Tax Considerations.” 

 

The imposition of IOF taxes may indirectly influence the price and volatility of our ADSs and our common shares.

 

Brazilian law imposes the Tax on Foreign Exchange Transactions, or the IOF/Exchange tax, on the conversion of reais into foreign currency and on the conversion of foreign currency into reais. Brazilian law also imposes the Tax on Transactions Involving Bonds and Securities, or the IOF/Securities tax, due on transactions involving bonds and securities, including those carried out on a Brazilian stock exchange.

 

The IOF/Exchange tax was raised from zero to 6% on October 20, 2009. As of December 1, 2011, certain investments were excluded from the 6% tax and subject instead to a 2% IOF/Exchange tax. In 2009, the IOF/Securities tax was increased from zero to 1.5% on shares issued by a Brazilian company and listed on a Brazilian stock exchange for the purpose of allowing depositary receipts traded outside Brazil to be issued. In 2011, the IOF/Securities tax was increased from zero to 1% on currency-related derivative transactions resulting in an increase of the short position exposure in foreign currency or in a decrease of the long position in foreign currency. Since June 30, 2013, the IOF/Exchange tax and the IOF/Securities tax rates have been zero.

 

The imposition of these taxes may discourage foreign investment in shares of Brazilian companies, including our company, due to higher transaction costs, and may negatively impact the price and volatility of our ADSs and common shares if they become listed on a stock exchange in the United States, as well as on the B3.

 

We may be classified as a passive foreign investment company, which could result in adverse U.S. tax consequences for U.S. investors.

 

We may be classified as a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes. Such characterization could result in adverse U.S. tax consequences to you if you are a U.S. Holder (as defined in “Item 10—Additional Information—Taxation—U.S. Federal Income Tax Considerations”) of our common shares or ADSs. For example, if we are a PFIC, U.S. Holders of our common shares or ADSs may become subject to increased tax liabilities under U.S. tax laws and regulations and will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, for any taxable year we will be classified as a PFIC for U.S. tax purposes if either (i) 75% or more of our gross income in that taxable year is passive income or (ii) the average percentage of our assets by value in that taxable year that produce or are held for the production of passive income is at least 50%. For this purpose, income from commodities transactions is generally considered passive unless such income is derived in the active conduct of a commodities business.

 

See “Item 10—Additional Information—Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company.”

 

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ITEM 4—INFORMATION ON THE COMPANY

 

A.History and Development of the Company Overview

 

Our legal and commercial name is BrasilAgro—Companhia Brasileira de Propriedades Agrícolas. We are a corporation (sociedade por ações) organized under the laws of Brazil, and were incorporated on September 23, 2005. Our principal offices are located at Avenida Brigadeiro Faria Lima, 1309, 5th floor, São Paulo, SP 0145-002, Brazil, and our telephone number is +55 11 3035 5350.

 

We are focused on the acquisition, development and exploration of agricultural properties that we believe possess significant potential for cash flow generation and value appreciation. We seek to transform our acquired properties through investments in infrastructure and technologies which permit cultivation of high value-added crops (soybean, corn, sugarcane and others) and cattle raising and from time to time sell our developed properties in order to realize capital gains.

 

Since our initial public equity offering and listing in Brazil on the B3 stock exchange in April 2006, or the IPO, and the subsequent commencement of our operations until the date hereof, we acquired 15 agricultural properties in seven Brazilian states, aggregating 300,288 hectares, of which 198,316 hectares were arable but less than 15% of which were cultivated when acquired and 101,972 hectares were protected by environmental regulation. Since then, four of our agricultural properties were fully sold and four of our agricultural properties were partly sold, representing in the aggregate a total area of 84,958 hectares. As of the date hereof, we hold 269,065 hectares, including 53,735 hectares leased.

 

In December 2013, we acquired a 50% interest in Cresca S.A., a company that owns 141,931 hectares of rural land in Paraguay, of which approximately 71,000 hectares were arable, but less than 12,000 hectares of which were cultivated when acquired, and approximately 70,931 were protected by environmental regulation. On October 5, 2016, we entered into an agreement with Carlos Casado S.A. (“Carlos Casado”), our partner in Cresca at the time, pursuant to which we agreed to try to sell all the land that Cresca owned for a 120-day period as of the execution date of the aforementioned agreement. Further to the provisions of the agreement, we and Carlos Casado also agreed to split ownership of the land among us and Carlos Casado if either party failed to dispose of the totality of the land within the 120-day period.

 

As the properties were not sold to third-parties, on June 6 and June 8, 2017, we and Carlos Casado decided to proceed with the redistribution of assets and liabilities of Cresca, whereby we would separate and divide the assets and liabilities of Cresca, and Cresca would re-distribute them to us and to Carlos Casado. As a result of this transaction, we now have the following two subsidiaries that received Cresca’s assets and liabilities: (i) Palmeiras S.A. (“Palmeiras”), which was incorporated on December 16, 2016 to operate the activities of our investment in Cresca S.A. and (ii) Agropecuária Moroti S.A. (“Moroti”), a subsidiary that received, on February 9, 2018, upon the conclusion of the re-distribution of assets and liabilities process, all other assets and liabilities of Cresca attributed to BrasilAgro, including land and debts.

  

On February 9, 2018, the re-distribution of assets and liabilities of Cresca was concluded and the portion of assets and liabilities attributed to us was transferred to the wholly-owned subsidiary Moroti. As of June 30, 2020, Moroti owned 59,585 hectares, of which 34,673 were arable.

 

On November 22, 2019, we entered into a merger agreement (the “Merger Agreement”) with Agrifirma Holding S.A. (“Agrifirma Holding”). Under the terms of the Merger Agreement, Agrifima Holding would be merged into us and we would receive all of its assets, rights and obligations, holding 100% of the equity capital of the subsidiary Agrifirma Agro Ltda. and its subsidiaries, in exchange for common shares and warrants (“Agrifirma Warrants”) issued by BrasilAgro to the selling shareholders of Agrifirma Holding (the “Merger”).

 

Agrifirma Agro Ltda. and its subsidiaries (“Agrifirma”) are engaged in the production, manufacture, storage and trading of agricultural products and the provision of agricultural services, as well as the management and commercial exploration of the properties that it owns. Since Agrifirma is engaged in operations in the same sector as BrasilAgro, we expect the following impacts by reason of the merger: operational, financial and commercial benefits, such as dilution of general and administrative expenses, capture of synergies and economies of scale in the operations and potential appreciation of undeveloped areas.

 

Agrifirma is comprised of its parent company (Agrifirma Agro Ltda.) and four subsidiaries, namely Agrifirma Bahia Agropecuária Ltda., I. A. Agro Ltda., GL Agropecuária Empreendimentos e Participações Ltda. and Agrifirma S.R.L.

 

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The completion of the Merger was subject to certain requirements and conditions precedent, which were met on January 27, 2020, following which BrasilAgro obtained control of Agrifirma. The Merger was accounted for pursuant to IFRS 3 – Business Combinations. Please see Note 1.1 to the financial statements included in this annual report.

 

Following the Merger, we added 28,930 hectares to our property portfolio, consisting of land located in the Western region of the State of Bahia, near our Jatobá and Chaparral farms, which are suitable for grain production and cattle raising. After the Merger, the total number of our outstanding shares is 62,104,301.

 

We invested more than R$1,013.3 million since our IPO to acquire, develop and transform agricultural properties.

 

We will continue the investments to develop and transform our agricultural properties in Brazil and Paraguay. In this regard, we will continue to apply for financing with government development banks.

 

From July 1, 2016 until the date hereof:

 

●in June 2020, we sold an area of 1,875 hectares (1,500 arable hectares) in the Jatobá farm, located in Jaborandi, in the State of Bahia. The total amount of the sale was 300 soybean bags per arable hectare, or R$45.0 million (approximately R$30,010 per arable hectare);

 

●in April 2020, we acquired the Serra Grande farm, located in the municipality of Baixa Grande do Ribeiro, in the State of Piauí. The Serra Grande farm has an area of 4,489 hectares, 2,904 hectares of which are arable to be developed, suitable for the cultivation of grains. The acquisition price was approximately R$25.0 million (R$8,600 per arable hectare);

 

●in May 2020, we sold an area of 105 hectares (105 arable hectares) in the Alto Taquari farm, located in Alto Taquari, in the State of Mato Grosso. The total amount of the sale was 1,100 soybean bags per arable hectare, or R$11.0 million (approximately R$105,000 per arable hectare);

 

●in January 2020, we concluded the merger of Agrifirma into us, which added 28,930 hectares to our property portfolio;

 

●in October 2019, we made an investment of US$ 1.0 million in Ag-Fintech Agrofy, or Agrofy, which represented a 1.8% stake in the share capital of Agrofy. Agrofy is an online marketplace that offers a complete range of e-commerce solutions customized to meet the needs of retailers and their partners, seeking an alternative way of connecting farmers and suppliers;

 

●in October 2019, we sold an area of 85 hectares (65 arable hectares) in the Alto Taquari farm, located in Alto Taquari, in the State of Mato Grosso. The total amount of the sale was 1,100 soybean bags per arable hectare, or R$5.5 million (approximately R$84,817 per arable hectare);

 

●in August 2019, we sold an area of 1,134 hectares (893 arable hectares) in the Jatobá farm, located in Jaborandi, in the State of Bahia. The total amount of the sale was 302 soybean bags per arable hectare, or R$23.2 million (approximately R$25,961 per arable hectare);

 

●during the 2019/2020 crop year, we developed 2,000 hectares of our 215,330 hectares of arable land through the cultivation of soybeans and other value-added crops;

 

  ● in June 2019, we sold an area of 3,124 hectares (2,473 arable hectares) in the Jatobá farm, located in Jaborandi, in the State of Bahia. The total amount of the sale was 285 soybean bags per arable hectare, or R$58.1 million (approximately R$23,500 per arable hectare);

 

  ● in November 2018, we sold an area of 103 hectares (103 arable hectares) in the Alto Taquari farm, located in Alto Taquari, in the State of Mato Grosso. The total amount of the sale was 1,100 soybean bags per arable hectare, or R$8.0 million (approximately R$77,690 per arable hectare);

 

  ● during the 2018/2019 crop year, we developed 2,000 hectares of our 169,270 hectares of arable land through the cultivation of soybeans and other value-added crops;

 

  ● on August 28, 2018, we leased an area of 23,568 hectares, located in the municipality of São Félix do Araguaia, in the State of Mato Grosso. The new farm was named Partnership V. The lease agreement has a term of up to 10 years and was followed market prices practiced in the region;

  

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  ● in July 2018, we sold an area of 9,784 hectares (7,485 arable hectares) in the Jatobá farm, located in Jaborandi, State of Bahia. The total amount of the sale was 285 soybean bags per arable hectare, or R$164.8 million (approximately R$22,018 per arable hectare);

  

  ● during the 2017/2018 crop year, we developed 2,000 hectares of our 172,032 hectares of arable land through the cultivation of soybeans and other value-added crops;

  

  ● in May 2018, we sold an area of 956 hectares (660 arable hectares) in the Araucária farm, located in Mineiros, State of Goiás. The total amount of the sale was 1,208 soybean bags per arable hectare, or R$52.4 million (approximately R$79,393 per arable hectare);

   

  ● in May 2018, we issued Agribusiness Receivables Certificates (ARC) in the aggregate amount of R$142.2 million. The ARCs are secured by debentures that were issued in two series, the first in the amount of R$85.2 million, and the second in the amount of R$57 million. The first series of debentures will mature on August 1, 2022 and be repaid in three annual installments starting on July 30, 2020, and accrue interest at 106.5% of the DI rate, payable on July 30 of each year. The second series of debentures will mature on July 31, 2023 and be repaid in four annual installments starting on July 30, 2020, and accrue interest at 110.0% of the DI rate, payable on July 30 of each year;

 

  ● on February 9, 2018, the re-distribution of assets and liabilities of Cresca was concluded and the portion of assets and liabilities attributed to us was transferred to the wholly-owned subsidiary Moroti. As of June 30, 2020, Moroti owned 59,585 hectares, of which 34,673 were arable;

 

  ● in June 2017, we sold an area in the Jatobá Farm, a rural property located in the State of Bahia. A total of 625 hectares (500 hectares of arable land) were sold, worth 300 soybean bags per hectare of arable land or R$10.1 million (approximately R$20,180/ha);

 

  ● in March 2017 and May 2017, we sold two areas in the Araucaria Farm, a rural property located in the State of Goias. In March 2017, 274 hectares (200 hectares of arable land) were sold in the amount of 1,000 soybean bags per hectare of arable land or R$12.5 million (R$13.2 million nominal value/approximately R$66,227/ha). The second area, sold in May 2017, totaled 1,360 hectares (918 hectares of arable land), worth 280 soybean bags per hectare or arable land or R$17.0 million (approximately R$18,535/ha). It is important to highlight that this area includes a lowland area and, therefore, the value of the sale per hectare of arable land is lower compared to the sale held in the same farm in March, which consisted of a plateau area;

 

  ● we conducted a purchase and agricultural partnership for a property in state of Maranhão, whereby we acquired 17,566 hectares, 10,137 hectares of arable land in February 2017, that has already been developed, and will be used for the planting of grain crops. The other 7,566 hectares are permanent preservation and legal reserve areas. The acquisition price is R$100.0 million (R$10 thousand/hectare of arable land) and the agricultural partnership consists of 15,000 of arable and developed land, already planted mostly with sugarcane. The Agricultural Partnership has a term of 15 years, which may be extended for the same period;

 

  ● during 2016/2017 crop year, we developed 5,117 hectares of our 199,114 hectares of arable land through the cultivation of soybeans and other value-added crops;

 

  ● on October 5, 2016, we entered into an agreement with Carlos Casado, our partner in Cresca, to try to sell all the land that Cresca owned or to split ownership of the land between us and Carlos Casado if a 120 day period since execution of the agreement lapsed;

 

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The map below indicates the location of our agricultural properties, their arable areas and their current or intended production activities as of September 30, 2020:  

 

   Property  Location  Acquisition/Lease Date  Total Area   Arable Area   Project  Ownership
            (ha)   (ha)       
1  Jatobá Farm  Jaborandi/BA  March 2007   14,930    11,590   Grains and Pasture  Owned
2  Alto Taquari Farm  Alto Taquari/MT  August 2007   5,103    3,503   Sugarcane  Owned
3  Araucária Farm  Mineiros/GO  April 2007   5,534    4,051   Sugarcane  Owned
4  Chaparral Farm  Correntina/BA  November 2007   37,182    26,444   Grains and Cotton  Owned
5  Nova Buriti Farm  Januaria/MG  December 2007   24,212    17,846   Forest  Owned
6  Preferência Farm  Barreiras/BA  September 2008   17,799    12,410   Grains and Pasture  Owned
7  Moroti Farm(1)  Boqueron/ Paraguay  February 2018   59,585    34,673   Grains and Pasture  Owned
8  Partnership II Farm(2)  Ribeiro Gonçalves/PI  November 2013   7,500    7,500   Grains  Leased
9  Partnership III Farm(3)  Alto Taquari/MT  May 2015   5,624    5,624   Sugarcane  Leased
10  Partnership IV Farm(4)  São Raimundo das Mangabeiras/MA  February 2017   15,000    15,000   Sugarcane  Leased
11  São José Farm  São Raimundo das Mangabeiras/MA  February 2017   17,566    10,137   Grains and Sugarcane  Owned
12  Partnership V Farm(5)  São Félix do Araguáia/MT  August 2018   20,138    20,138   Grains  Leased
13  Arrojadinho Farm(6)  Jaborandi/BA  January 2020   16,642    10,306   Grains  Owned
14  Rio do Meio Farm(7)  Jaborandi/BA  January 2020   12,288    8,501   Grains  Owned
15  Serra Grande Farm  Baixa Grande do Ribeiro/PI  April 2020   4,489    2,904   Grains  Owned
16  Partnership VII Farm(8)  Baixa Grande do Ribeiro/PI  December 2019   5,473    5,473   Grains  Leased
                          
   Total         269,065    196,100       

  

(1)New corporate name of the operations in Paraguay. In the year ended June 30, 2020, we reassessed land use planning and adjusted the farm area.

 

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(2)BrasilAgro entered into an agricultural exploration partnership with respect to the Partnership II Farm for up to 11 harvests, involving up to 10,000 hectares.
(3)BrasilAgro entered into an agricultural exploration partnership with respect to the Partnership III Farm with a term valid until March 31, 2026.
(4)BrasilAgro entered into an agricultural exploration partnership with respect to the Partnership IV Farm for a term of 15 years for planting sugarcane, with an option to renew for another 15 years.
(5)BrasilAgro entered into an agricultural exploration partnership with respect to the Partnership V Farm for a term of up to 10 years.
(6)Previously referred to as Partnership VI, the farm was acquired through the Merger of Agrifirma.
(7)Farm acquired through the Merger of Agrifirma.
(8)BrasilAgro entered into an agricultural exploration partnership with respect to the Partnership VII Farm for a term of up to 10 years.

 

We have a policy of performing annual appraisals of the fair market value of our agricultural properties. We estimate the market value of our agricultural properties based on each property’s level of development, soil quality and maturity and agricultural potential. For more information concerning our estimates of the fair market value of our agricultural properties, see Note 10 to our financial statements for the fiscal year ended June 30, 2020.

 

Our estimates of the market value of our agricultural properties are based on several assumptions, methodologies, estimates and subjective judgments, all of which are inherently subject to significant commercial, economic, competitive and operational uncertainties, most of which are beyond our control and unforeseeable and therefore no assurance can be given that they are correct. Furthermore, market values of real estate are subject to significant fluctuations and are also subject to significant commercial, economic and competitive uncertainties, most of which are beyond our control, and thus such estimates should not be considered as indicative of the values that we will or may be able to receive in exchange for such properties. For more information on the risks we are exposed to, see “Item 3—Key Information—Risk Factors.” The table below indicates the historical cost of acquisition of the land and of subsequent improvements, as well as the estimated fair market value, with respect to our agricultural properties, as of June 30, 2020.

 

The SEC maintains an internet website at www.sec.gov that contains reports, proxy and information statements and other information regarding companies that file or furnish documents electronically to the SEC, including us. Our internet website is www.brasil-agro.com. The information included on our internet website or the information that might be accessed through such website is not included in this annual report and is not incorporated into this annual report by reference.

 

Property  Location  Acquisition Date  Total Area   Land and Improvement Cost as of
June 30,
2020(1)		   Estimated Fair Market Value as of June 30,
2020		   Appreciation(2) 
         (ha)   (R$ millions)         
Jatobá Farm  Jaborandi/BA  March 2007   14,930    28.4    242.5    755%
Alto Taquari Farm  Alto Taquari/MT  August 2007   5,103    33.3    194.5    485%
Araucária Farm  Mineiros/GO  April 2007   5,534    45.5    190.3    318%
Chaparral Farm  Correntina/BA  November 2007   37,182    89.6    417.7    366%
Nova Buriti Farm  Januaria/MG  December 2007   24,212    23.5    35.3    50%
Preferência Farm  Barreiras/BA  September 2008   17,799    27.1    68.2    152%
Moroti Farm  Boqueron Paraguay  February 2018   59,585    233.0    235.3    1%
São José Farm  São Raimundo das Mangabeiras/MA  February 2017   17,566    110.4    247.6    124%
Arrojadinho Farm  Jaborandi/BA  January 2020   16,642    84.8    88.5    4%
Rio do Meio Farm  Jaborandi/BA  January 2020   12,288    120.8    123.1    2%
Serra Grande Farm  Baixa Grande do Ribeiro/PI  April 2020   4,489    26.1    30.3    16%
Total         215,330    822.3    1,873.3    128%

  

(1)Consists of land and capital expenditures, including buildings, infrastructure and other improvements to the property, net of depreciation expenses.
(2)Appreciation includes the impact of inflation since the acquisition date.

 

B.Business Overview

 

We are focused on the acquisition, development and exploration of agricultural properties that we believe possess significant potential for cash flow generation and value appreciation. We seek to transform our acquired properties through investments in infrastructure and technologies which permit cultivation of high value-added crops (soybean, corn, sugarcane and other) and cattle raising and from time to time sell our developed properties in order to realize capital gains. We are currently involved in several farming activities, including grains and sugarcane production and cattle raising.

 

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Effects of the COVID-19 Pandemic

 

Government measures in Brazil

 

In light of the COVID-19 pandemic outbreak, the Brazilian government created a crisis committee to monitor the impact of COVID-19 in March 2020. Since then, it has announced several measures (tax and others) to address the effects of COVID-19. In this regard, the Brazilian health authorities, as well as several state and municipal authorities have adopted or recommended social distancing measures. Likewise, the Brazilian Congress is currently discussing several measures to increase the Brazilian government’s revenues, such as imposing new taxes, revoking tax benefits and increasing the rates of current taxes, including revoking the tax exemption granted to dividend distributions paid by Brazilian companies, which could affect the return of our investments, as well as of our shareholders.

 

In Brazil, states and municipalities may also revoke tax benefits and increase the rates of current taxes to increase their revenues

 

Company measures

 

In order to guarantee the hygiene and safety conditions established by the Brazilian Ministry of Health (Ministério da Saúde) and to preserve the health of our employees, we have adopted a plan with several measures established especifically for this purpose.

 

Key initiatives were the creation of a Prevention and Risk Committee, implementing remote work arrangements and the adoption of several measures and protocols to preserve the safety of all people involved in our operations, following the guidelines established by the Brazilian Ministry of Health (Ministério da Saúde).

 

Measures were also taken to support our operations and preserve cash, such as:

 

●contracting new lines of credit, such as financing for agricultural cost, sugarcane and for working capital purposes;

 

●early delivery of inputs; and

 

●anticipating sales of agricultural products to ensure greater storage capacity.

 

Additionally, as of June 30, 2020, although we did not record material losses or gains in our 2020 financial results directly related to the pandemic, we continue to monitor possible future impacts due to:

 

●exchange rate volatility, in connection with derivative operations related to currency operations and operations with commodities that we enter into to guarantee production margins in financial operations. For more information, see “Item 5—Operating and Financial Review and Prospects—Results of Operations.”

 

●volatility in sugar and ethanol prices and the consequent impact on sugarcane demand and prices;

 

●changes in the expected sugarcane payment cycle arising from negotiations with our customers; as of June 30, 2020 none of our customers had missed payments; and

 

●volatility in other commodity prices.

 

Our operations in Brazil and Paraguay continue without any material changes. Most of our business operations have not experienced any major disruption.

 

Agricultural Activities and Products

 

Independent Production

 

As of June 30, 2020, we were the operators with respect to our entire portfolio of agricultural properties. In the context of our independent operations, we maintain exclusive control over our production and exclusive responsibility for the acquisition of inputs, raw materials and equipment, hiring and oversight of employees, and infrastructure investment. We currently sell a substantial portion of our production to a small number of import/export companies or customers who have substantial bargaining power. Our net revenue was R$487.6 million for the year ended June 30, 2020 and R$357.9 million for the year ended June 30, 2019. All of our sales are to customers located in Brazil and Paraguay.

 

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We enter into short-term contractual arrangements with third-party contractors, at all stages of the production process, for the provision of services (including our workforce), equipment, and infrastructure needs. We believe that this allows us to be more agile in adapting to market conditions as they unfold.

 

Our agricultural properties are managed by local managers, either on a regional level or for specific properties, depending on the location and size of each property. As of June 30, 2020, we had one senior general manager for all of our farms, one manager at the São José Farm and Partnership IV farms, one manager at the Serra Grande, Partnership II and Partership VII farms, one manager at the Arrojadinho and Jatobá farms, one manager at the Chaparral and Rio do Meio farms, one manager at the Preferência Farm, one manager at the Partnership V farm, one regional manager at the Araucária, Alto Taquari and Partnership III farms, and one manager at the Moroti Farm.

 

Leases

 

As an alternative to independent production, we leased in the past, and may lease again in the future, our agricultural properties to third parties.

 

Generally, our leases are subject to different obligations depending on the stage of development of the subject property. With respect to leases of our properties on which the land is undeveloped, lessees are subject to several terms and conditions, including requirements to invest and to use the techniques and equipment that we believe are necessary and appropriate for the preparation and correction of the soil in order to facilitate agricultural production. In addition to leases of land, we may also lease individual farmhouses or warehouses to lessees, pursuant to which we receive a portion of the agricultural production, in kind, produced by the lessee. Our leases generally last between three to ten years. Under Brazilian law, lessees have a right of first refusal to purchase farms when they are leased by them.

 

Grains

 

The planting season for grains runs from September to December, and harvest occurs between February and May of each year. During the planting season for our 2019/2020 crop year, we planted 81,905 hectares of grains at our grain farms in Brazil and Paraguay. For the years ended June 30, 2020 and 2019, net revenue from sale of grains accounted for 47.9% and 47.9% of our net revenue, respectively.

 

All distribution of production from the farms is through road transportation. We enter into third-party service contracts to transport production from our farms to our storage facilities or to our customers.

 

Sugarcane

 

The sugarcane planting season runs from February to May of each year, and harvest occurs between April and November of each year. On June 30, 2020, we had 29,169 hectares planted with sugarcane at our Araucária, Alto Taquari, São José Farm, Partnership III and Partnership IV farms.

 

We entered into a supply contract with Brenco, pursuant to which we currently supply the entirety of our sugarcane production from our Alto Taquari, Araucária, and Partnership III farms to them. The term of this supply contract covers two full crop cycles, which consists of six crop years and five harvests, and is scheduled to expire in 2021/2022. In the year ended June 30, 2020 and as of the date hereof, Brenco has not defaulted on the payment of any receivable. We currently run the risk of default by Brenco, our main customer, associated with the fact that its controlling shareholder, Odebrecht S.A., is being investigated by the Brazilian Federal Police for corruption in the operation called “Lava Jato” (Car Wash) and the fact that Brenco filed for reorganization bankruptcy in Brazil (recuperação judicial) in May 2019.

 

In the table below, we present the aging of the receivables from Brenco, based on contractual terms.

 

  

As of

June 30,

2020

 
Falling due:  (in R$ thousands) 
     
Up to 30 days   10,402 
30 to 90 days   — 
91 to 180 days   — 
181 to 360 days   1,570 
Total   11,972 

 

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On May 8, 2015, we entered into a lease agreement with respect to a property located in the municipalities of Alto Taquari and Alto Araguaia, in the state of Mato Grosso (“Partnership III”), pursuant to which we have the right to operate an area of 4,263 hectares by March 31, 2026. The properties are close to Alto Taquari Farm, a region that has had excellent sugarcane production results. This transaction allows us to make use of the operational structure and team already present in the region and ensure greater property management flexibility.

 

We entered into a supply contract with Agro Serra, pursuant to which we currently supply the entirety of our sugarcane production from our Partnership IV farm to them. The term of this supply contract is 15 years, renewable for another 15 years.

 

For the years ended June 30, 2020 and 2019, net revenue from the sale of sugarcane accounted for 39.6% and 44.8% of our net revenue, respectively.

 

Our farm output is distributed through road transportation. We enter into third-party service contracts with trucking companies to transport production from our farms to our customers’ sugar and ethanol refineries.

 

Livestock

 

As of June 30, 2020, we had 15,064 head of cattle distributed over 13,721 hectares of active pasture.

 

Cotton

 

The planting season for cotton runs from September to December of each year, and the harvest occurs between February and May of each year. During the planting season for our 2019/2020 crop year, we planted 1,713 hectares of cotton at our Chaparral farm. For the year ended June 30, 2020, net revenue from the sale of cotton accounted for 2.7% of our revenue.

 

Others

 

As of June 30, 2020, we had 24,212 hectares of farmland at our Nova Buriti farm. We are currently in the process of obtaining the necessary permits in order to begin operations. Due to the difficulties we have been facing in regard to obtaining licenses for the farm, we are studying alternatives for the property. One such option is to sell the farm to offset the legal reserve, a mechanism contemplated in the environmental code pursuant to which holders of a legal reserve deficit can acquire another area to solve certain issues.

 

Investment properties

 

As of June 30, 2020, the net book value of our investment properties was R$858.3 million, of which R$686.1 million represented land acquisition costs and R$172.2 million (net of accumulated depreciation) represented improvements, including building and infrastructure improvements and costs of clearing and preparing the land. For the years ended June 30, 2020 and 2019, gains on farm sales accounted for R$61.4 million and R$142.8 million, respectively.

 

Agricultural Properties

 

As of June 30, 2020, we owned eleven agricultural properties, totaling 196,100 hectares of arable land (not including environmental preservation areas in accordance with Brazilian and Paraguayan environmental law), including 53,735 hectares of leased area, located in the Brazilian States of Mato Grosso, Goiás, Minas Gerais, Maranhão, Bahia, Piauí and in Paraguay. During the planting season for our 2019/2020 crop year, we planted 54,342 hectares of soybean, 24,939 hectares of corn (1st and 2nd crops), 29,169 hectares of sugarcane, 23,561 hectares of other grains (sesame, sorghum and others and leased areas to third parties), 2,624 hectares of beans, 1,713 hectares of cotton and 16,806 hectares of pasture. Except for part of the Nova Buriti farm, we acquire and hold our agricultural properties through subsidiaries, a structure we believe will simplify the future sale of such properties in accordance with Brazilian law. In addition, we entered into rural partnerships to operate agricultural properties, the Partnerships II, III, IV, V and VII.

 

São José Farm: As of June 30, 2020, the São José farm had an area of 17,566 hectares. The São José farm was acquired by our subsidiary Imobiliária Ceibo Ltda. in February 2017 for R$100.0 million. The property is located in the State of Maranhão, in the Northeastern region of Brazil.

 

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We acquired 17,566 hectares, 10,137 hectares of which are arable and have already been developed, and will be used for the planting of grain crops. The other 7,429 hectares are permanent preservation and legal reserve areas. The acquisition price is R$100.0 million (R$10 thousand/arable hectare).

 

The agricultural partnership consists of 15,000 hectares of arable and developed land, already planted mostly with sugarcane. The agricultural partnership has a term of 15 years, which may be extended for the same period.

 

During the planting season for our 2019/2020 crop year, we planted 4,836 hectares of soybean, 580 hectares of corn, 631 hectares of second corn crop and 18,668 hectares of sugarcane at the São José farm.

 

Jatobá Farm: As of June 30, 2020, the Jatobá farm had an area of 14,930 hectares. The Jatobá farm was acquired by us, in partnership with Grupo Maeda, in 2007, for R$33.0 million. On May 12, 2012, we acquired Grupo Maeda’s partnership stake and became 100% owners of the Jatobá farm, through our subsidiary Jaborandi Propriedades Agrícolas. The property is located in the Municipality of Jaborandi, State of Bahia, in the Northeastern region of Brazil, which we believe to be advantageous for export purposes due to the presence of the Port of Candeias in the State of Bahia.

 

On June 30, 2017, we sold 625 hectares of our Jatobá farm, 500 of which are arable, for a total sale price of R$10.1 million, equivalent to 300 soybean bags per arable hectare. In July 2018, we sold 9,784 hectares of our Jatobá farm, 7,485 of which are arable, for a total sale price of R$164.8 million, equivalent to 285 soybean bags per arable hectare. In June 2019, we sold 3,124 hectares of our Jatobá farm, 2,473 of which are arable, for a total sale price of R$58.1 million, equivalent to 285 soybean bags per arable hectare. In September 2019, we sold 1,134 hectares of our Jatobá farm, 893 of which are arable, for a total sale price of R$23.2 million, equivalent to 302 soybean bags per arable hectare. In June 2020, we sold 1,875 hectares of our Jatobá farm, 1,500 of which are arable, for a total sale price of R$45.0 million, equivalent to 300 soybean bags per arable hectare. After these sales, the area of the Jatobá farm held by us is 14,930 hectares, of which approximately 11,590 hectares are arable.

 

Alto Taquari Farm: As of June 30, 2020, the Alto Taquari farm had an area of 5,103 hectares. The Alto Taquari farm was acquired by our subsidiary Imobiliária Mogno in August 2007 for R$33.2 million. The deed was granted in September 2015 after we paid the outstanding balance of R$27.4 million. Prior to our acquisition, the Alto Taquari farm was used for grain cultivation and cattle raising. As of June 30, 2020, we planted 2,525 hectares of sugarcane, 784 hectares of soybeans and 663 hectares of second corn crop. The 2009/2010 crop year marked the beginning of our obligations in compliance with our supply contract with Brenco, under which we supply the entirety of our sugarcane production from the Alto Taquari farm to them for a term of two complete crop cycles (six crop years and five harvests), which is expected to end in 2023. The property is located in the Municipality of Alto Taquari, State of Mato Grosso.

 

In November 2018, we sold 103 hectares of our Alto Taquari farm, all of which are arable, for a total sale price of R$8.0 million, equivalent to 1,100 soybean bags per arable hectare. In October 2019, we sold 85 hectares of our Alto Taquari farm, 65 of which are arable, for a total sale price of R$5.5 million, equivalent to 1,100 soybean bags per arable hectare. In May 2020, we sold 105 hectares of our Alto Taquari farm, all of which are arable, for a total sale price of R$11.0 million, equivalent to 1,100 soybean bags per arable hectare. After these sales, the area of the Alto Taquari farm held by us is 5,103 hectares, of which approximately 3,503 hectares are arable.

 

Araucária Farm: As of June 30, 2020, the Araucária farm had an area of 5,534 hectares. The Araucária farm was acquired by our subsidiary Imobiliária Araucária in April 2007, in partnership with Brenco, in the proportion of 75% and 25%, respectively, for the total amount of R$80.0 million. The deed for Araucária farm was granted on November 20, 2008, and it was registered on November 24, 2008, upon which our partnership with Brenco was terminated and we remained the sole owners of 9,682 hectares of the Araucária farm, equivalent to R$70.7 million. The property is located in the Municipality of Mineiros, in the State of Goiás, and is primarily used for the cultivation of sugarcane and grain.

  

On May 2018, we sold 956 hectares of our Araucária Farm, 660 of which are arable (for a total sale price of R$52.4 million, equivalent to 1,208 soybean bags per arable hectare). On March 27, 2017, we sold 274 hectares of our Araucária Farm, 200 of which are arable, for a total sale price of R$12.5 million or (R$13.2 million nominal value, equivalent to 1,000 soybean bags). On May 30, 2017, we sold 1,360 hectares of our Araucária Farm, 918 of which are arable, for a total sale price of R$17.0 million, equivalent to 280 soybean bags. On April 25, 2013, we sold 394 hectares of our Araucária farm, 310 of which are arable, for a total sale price of R$10.3 million, equivalent to 48,000 soybean bags, and on June 27, 2014, we sold 1,164 hectares of our Araucária Farm, 913 of which are arable, for a total purchase price of R$41.3 million, equivalent to 735,000 soybean bags. After the sales, the area of Araucária farm held by us was 5,534 hectares, of which approximately 4,051 hectares are arable.

 

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The 2009/2010 crop year marked the beginning of our obligations under our supply contract with Brenco to supply the entirety of our sugarcane production from the Araucária farm to them for a term of two complete crop cycles (six crop years and five harvests), which is expected to end in 2020.

 

Chaparral Farm: As of June 30, 2020, the Chaparral farm had an area of 37,182 hectares. The Chaparral farm was acquired by our subsidiary Imobiliária Cajueiro in November 2007 for R$47.9 million. The deed was granted on September 29, 2008 and was registered on December 12, 2008. The property is located in the Municipality of Correntina, State of Bahia.

 

During the planting season for our 2019/2020 crop year, we planted 9.552 hectares of soybean, 1,713 hectares of cotton, 301 hectares of second bean crop, 3,085 hectares of pasture and 4,598 hectares of others cultures at the Chaparral farm.

  

Nova Buriti Farm: As of June 30, 2020, the Nova Buriti farm had an area of 24,212 hectares. The Nova Buriti farm was acquired in December 2007 for the total amount of R$22.0 million. The transfer of 3,064 hectares was made in May 2010 to our subsidiary Imobiliária Flamboyant Ltda. and the remaining 21,147 hectares was transferred to us in August 2017, upon the payment of the balance of the price of the amount of R$12.8 million, with the exclusion of the monetary correction as negotiated with the seller. Our subsidiary Imobiliária Flamboyant Ltda. holds a 13% interest in the property, and we hold the remaining 87%. The property is located in the municipality of Bonito de Minas and Cônego Marinho, State of Minas Gerais in the Southeastern region of Brazil, which is in close proximity to major iron producers who utilize large quantities of biofuel, especially from eucalyptus wood, to generate electricity.

 

We are currently in the process of obtaining the necessary permits in order to begin operations. Due to the difficulties we have been facing in regard to obtaining licenses for the farm, we are studying alternatives for the property. One such option is to sell the farm to offset the legal reserve, a mechanism contemplated in the environmental code pursuant to which holders of a legal reserve deficit can acquire another area to solve certain issues.

 

Preferência Farm: As of June 30, 2020, the Preferência farm had an area of 17,799 hectares. The Preferência farm was acquired in September 2008 by our subsidiary Imobiliária Cajueiro for R$9.6 million. The deed was granted on September 4, 2009, and registration was made on February 24, 2010. The property is located in the Municipality of Barreiras, State of Bahia. We use the property for cattle raising and grain cultivation.

 

As of June 30, 2020, we had 6,344 hectares of active pasture at our Preferência farm.

 

Partnership II: On October 11, 2013, we entered into a rural partnership agreement with respect to Partnership II farm for up to 11 harvests, which is expected to end in June 2024. The Partnership II farm is located in the municipality of Ribeiro Gonçalves, in the state of Piauí, which has had excellent grain production results. We operate an area up to 7,500 hectares, which is suitable for grain crops. During the planting season for our 2019/2020 crop year, we planted 7,608 hectares of grains at the Partnership II farm.

 

Partnership III: On May 8, 2015, we entered into a rural partnership agreement with respect to a property located in the municipalities of Alto Taquari and Alto Araguaia, in the state of Mato Grosso (“Partnership III”), pursuant to which we have the right to operate an area of up to 5,624 hectares until March 31, 2026. The properties are close to the Alto Taquari Farm, a region that has had excellent sugarcane production results. This transaction allows us to make use of the operational structure and team already present in the region and ensure greater property management flexibility.

 

Partnership IV: On January 11, 2017, we entered into a rural partnership agreement with respect to a property located in the municipalities of São Raimundo das Mangabeiras, in the state of Maranhão (“Partnership IV”), pursuant to which we have the right to operate an area of up to 15,000 hectares. The agricultural partnership is already planted mostly with sugarcane and has a term of 15 years, renewable for another 15 years.

 

Partnership V: On August 28, 2018, we entered into a rural partnership agreement with respect to a property located in São Felix do Araguaia, in the state of Mato Grosso (“Partnership V”), pursuant to which we have the right to operate an area of up to 20,138 hectares for up to 10 years. These areas are mature, with more than five years under production and are suitable for a second crop.

 

During the planting season for our 2019/2020 crop year, we planted 37,625 hectares of grains (crop and second crop) at the Partnership V farm.

 

Serra Grande and Partnership VII: In April 2020, we acquired the Serra Grande farm located in Baixa Grande do Ribeiro, in the State of Piauí. The acquisition consisted of an area of 4,489 hectares, 2,904 hectares of which are arable to be developed and are suitable for grains cultivation. The other 1,585 hectares are permanent preservation and legal reserve areas. The acquisition price was R$25.0 million, or R$8,600 per arable hectare. We made an initial payment of R$10.7 million and will make remaining payments in three equal annual installments.

 

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In addition to the acquisition, the Company has an agricultural partnership in an area of 5,473 hectares of arable and developed land, already planted and operated by the Company during the 19/20 harvest (Partnership VII). This area is contiguous to the acquired area, has more than 5 years in average of production and high production potential. Partnership VII has a term up to 12 years, with a call option until 2024.

 

Cresca: Cresca is a company that invests in agricultural and cattle raising land in Paraguay. On December 12, 2013, we entered into an agreement with Cresud, our controlling shareholder, for: (i) the acquisition of its interest in Cresca S.A., representing a 50% interest of the company, (ii) the assumption of Cresud credits with Cresca, and (iii) the execution of an advisory service agreement, pursuant to which Cresud agreed to render services to Cresca in exchange for the payment of fees. The total consideration of the transaction was US$19.8 million.

 

On the purchase date, Cresca had approximately 81,000 hectares and had a contract for the right to purchase approximately 61,000 additional hectares of agricultural land in the region of Mariscal Estigarribia in Paraguay. Pursuant to this agreement, Cresca purchased 35,864 hectares on July 9, 2014, and the remaining 24,753 hectares on January 20, 2015.

 

On April 4, 2014, Cresca sold 24,624 hectares in Paraguay, 12,312 of which are arable, for a total price of US$14.8 million (US$600 per hectare). The purchaser made an initial payment of US$1.9 million and paid the first installment in the amount of US$4.3 million upon the execution of the property transfer deed and the sold area possession transfer. The purchaser made payments totaling the amount of US$3.7 million in 2015 and a final payment of US$4.9 million on July 20, 2016.

 

On October 5, 2016, we entered into an agreement with Carlos Casado, our partner in Cresca at the time, pursuant to which we agreed to try to sell all the land that Cresca owned for a 120-day period as of the execution date of the aforementioned agreement. Further to the provisions of the agreement, we and Carlos Casado also agreed to split ownership of the land among us and Carlos Casado if either party failed to dispose of the totality of the land within the 120-day period.

 

As the properties were not sold to third-parties, on June 6 and June 8, 2017, we and Carlos Casado decided to proceed with the re-distribution of assets and liabilities of Cresca, whereby we would separate and divide the assets and liabilities of Cresca, and Cresca would re-distribute them to us and to Carlos Casado. As a result of this transaction, we now have the following two subsidiaries that received Cresca’s assets and liabilities: (i) Palmeiras, which was incorporated to operate the activities of the Company’s investment in Cresca and (ii) Moroti, a subsidiary that received, on February 9, 2018, upon conclusion of the process, all other assets and liabilities of Cresca attributed to BrasilAgro, including land and debts.

 

On February 9, 2018, the re-distribution of assets and liabilities of Cresca was concluded and the portion of assets and liabilities attributed to the Company was transferred to the wholly-owned subsidiary Moroti.

 

As part of the re-distribution of assets and liabilities, the Company and Carlos Casado, partners in the joint venture, decided to waive the interest for late payment on the intercompany loans taken by Cresca in the total amount of R$32.9 million, of which BrasilAgro’s share was R$16.6 million. See Note 1.6 to our financial statements for the fiscal year ended June 30, 2020.

 

As of June 30, 2020, Moroti owned 59,585 hectares of which 34,673 were arable. During the planting season for our 2019/2020 crop year, we planted 6,286 hectares of soybean, 2,196 hectares of corn, 3,167 hectares of other grains and 3,064 hectares of pasture at the farm in Paraguay.

 

Arrojadinho Farm: On November 22, 2019, we entered into a Merger Agreement with Agrifirma Holding. Under the terms of the Merger Agreement, Agrifima Holding would be merged into us and we would receive all of its assets, rights and obligations, holding 100% of the equity capital of the subsidiary Agrifirma Agro Ltda. and its subsidiaries, in exchange for common shares and Agrifirma Warrants issued by BrasilAgro to the selling shareholders of Agrifirma Holding.

 

Agrifirma and its subsidiaries are engaged in the production, manufacture, storage and trading of agricultural products and the provision of agricultural services, as well as the management and commercial exploration of the properties that it owns. Since Agrifirma is engaged in operations in the same sector as BrasilAgro, we expect the following impacts immediately after the merger: operational, financial and commercial benefits, such as dilution of general and administrative expenses, capture of synergies and economies of scale in the operations and potential appreciation of undeveloped areas.

 

Agrifirma is comprised of its parent company (Agrifirma Agro Ltda.) and four subsidiaries, namely Agrifirma Bahia Agropecuária Ltda., I. A. Agro Ltda., GL Agropecuária Empreendimentos e Participações Ltda. and Agrifirma S.R.L.

 

The completion of the Merger was subject to certain requirements and conditions precedent, which were met on January 27, 2020, following which BrasilAgro obtained control of Agrifirma. The Merger was accounted for pursuant to IFRS 3 – Business Combinations. Please see Note 1.1 to the financial statements included in this annual report.

 

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Following the Merger, we added 28,930 hectares to our property portfolio, of which 16,642 hectares are on the Arrojadinho Farm, located in Jaborandi, in the State of Bahia. The Arrojadinho farm is suitable for grain production and cattle raising.

 

During the planting season for our 2019/2020 crop year, we planted 3,760 hectares of grains at the Arrojadinho farm.

 

Rio do Meio Farm: On November 22, 2019, we entered into a Merger Agreement with Agrifirma Holding. Under the terms of the Merger Agreement, Agrifima Holding would be merged into us and we would receive all of its assets, rights and obligations, holding 100% of the equity capital of the subsidiary Agrifirma Agro Ltda. and its subsidiaries, in exchange for common shares and Agrifirma Warrants issued by BrasilAgro to the selling shareholders of Agrifirma Holding.

 

Agrifirma and its subsidiaries are engaged in the production, manufacture, storage and trading of agricultural products and the provision of agricultural services, as well as the management and commercial exploration of the properties that it owns. Since Agrifirma is engaged in operations in the same sector as BrasilAgro, we expect the following impacts immediately after the merger: operational, financial and commercial benefits, such as dilution of general and administrative expenses, capture of synergies and economies of scale in the operations and potential appreciation of undeveloped areas.

 

Agrifirma is comprised of its parent company (Agrifirma Agro Ltda.) and four subsidiaries, namely Agrifirma Bahia Agropecuária Ltda., I. A. Agro Ltda., GL Agropecuária Empreendimentos e Participações Ltda. and Agrifirma S.R.L.

 

The completion of the Merger was subject to certain requirements and conditions precedent, which were met on January 27, 2020, following which BrasilAgro obtained control of Agrifirma.

 

Following the Merger, we added 28,930 hectares to our property portfolio, of which 12,288 hectares are on the Rio do Meio Farm, located in Jaborandi, in the State of Bahia. The Rio do Meio farm is suitable for grain production and cattle raising.

 

During the planting season for our 2019/2020 crop year, we leased 8,043 hectares of the Rio do Meio farm to third parties.

 

Investment in Brenco – Companhia Brasileira de Energia Renovável

 

In March 2007, we acquired an indirect minority interest in Brenco, controlled by Odebrecht S.A., through our 40.65% investment in Green Ethanol LLC (previously known as Tarpon All Equities Fund LLC), which we acquired for a purchase price of US$2.5 million. Green Ethanol LLC held 2.47% of the capital stock of Brenco, including 7,600,000 warrants issued by Brenco. In March 2008, we signed contracts for the exclusive supply to Brenco of the entirety of our sugarcane production over two full crop cycles. See “Item 4—Information On the Company—Material Agreements.”

 

In September 2008, Green Ethanol LLC decreased its shareholding in Brenco to 1.55% of Brenco’s capital stock, which percentage was subsequently increased to 3.80% in December 2008. In February 2010, ETH Bioenergia acquired substantially all of the capital stock of Brenco, thereby diluting our indirect ownership interest (held through Green Ethanol LLC) to 0.05% of Brenco’s capital stock as of December 31, 2010. As a result of the losses incurred by Brenco and of the significant level of debt, we carried out an impairment analysis of our investment interest in Brenco. As a result of such assessment, we recorded an impairment loss on our investment of R$6.6 million as of July 1, 2009.

 

Commodity Futures Contracts

 

We enter into sales contracts for the future sale and physical delivery of our agricultural commodities to international import/export companies. Such contracts are primarily with respect to soybean, but also include sugarcane in connection with our exclusive supply agreement with Brenco. In the case of soybean, we may contract a fixed price for all or part of the volume to be delivered. The price is determined according to a contractual formula based on the soybean quotation at the Chicago Board of Trade (CBOT). The price established in U.S. dollars is paid at the end of the commitment period, in reais, according to contractually defined exchange rates prevailing a few days before settlement. The terms of the agreements subject us to fines in the event that we fail to deliver the previously-committed volumes to the purchaser.

 

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Material Agreements

 

Agrifirma

 

On November 22, 2019, we entered into a Merger Agreement with Agrifirma Holding. Under the terms of the Merger Agreement, Agrifima Holding would be merged into us and we would receive all of its assets, rights and obligations, holding 100% of the equity capital of the subsidiary Agrifirma Agro Ltda. and its subsidiaries, in exchange for common shares and Agrifirma Warrants issued by BrasilAgro to the selling shareholders of Agrifirma Holding.

 

Agrifirma and its subsidiaries are engaged in the production, manufacture, storage and trading of agricultural products and the provision of agricultural services, as well as the management and commercial exploration of the properties that it owns. Since Agrifirma is engaged in operations in the same sector as BrasilAgro, we expect the following impacts immediately after the merger: operational, financial and commercial benefits, such as dilution of general and administrative expenses, capture of synergies and economies of scale in the operations and potential appreciation of undeveloped areas.

 

Agrifirma is comprised of its parent company (Agrifirma Agro Ltda.) and four subsidiaries, namely Agrifirma Bahia Agropecuária Ltda., I. A. Agro Ltda., GL Agropecuária Empreendimentos e Participações Ltda. and Agrifirma S.R.L.

 

The completion of the Merger was subject to certain requirements and conditions precedent, which were met on January 27, 2020, following which BrasilAgro obtained control of Agrifirma.

 

Based on the terms of the Merger Agreement, the consideration transferred in the form of shares was determined based on an initial exchange ratio (preliminary numbers), final exchange ratio (adjustment to exchange ratio) and adjustments due to indemnifications. The Merger Agreement also sets forth the minimum number of shares to be transferred at 5,392,872.

 

The parties agreed to define a first exchange ratio based on preliminary book values as of June 30, 2019, adjusted for the market value of the real state held by BrasilAgro and Agrifirma Holding, according to an appraisal report issued by a specialized third party. In addition, part of the consideration was agreed to be issued by us in the form of subscription warrants. As a result, the number of shares and warrants to be issued to the shareholders of Agrifirma was set at 5,215,385 shares and 654,487 warrants.

 

Pursuant to the Merger Agreement, the initial exchange ratio was adjusted to reflect the changes in the assets described above on the preliminary balance sheet as of June 30, 2019 through the acquisition date, on January 27, 2020, which was the date of the consummation of the Merger Agreement.

 

On April 1, 2020, BrasilAgro notified the former shareholders of Agrifirma Holding that the final exchange ratio, based on the changes in net equity from June 30, 2019 to January 27, 2020, was determined and reached the minimum number established in the merger agreement, totaling 5,392,872 shares as the final consideration to be paid by Brasilagro.

 

The Merger Agreement also sets forth certain obligations for the payment of compensation by BrasilAgro and the selling shareholders of Agrifirma if certain contractually indemnifiable losses occur within two years from the date of the Merger Agreement.

 

On June 18, 2020, BrasilAgro and the selling shareholders of Agrifirma signed a settlement agreement, pursuant to which the final exchange ratio was agreed at the minimum number of shares, totaling 5,392,872 shares. The parties also agreed that, given the resolution of a contingency by the date of the settlement agreement, the selling shareholders of Agrifirma agreed to return the amount of R$3,500,000 in restricted shares and Agrifirma Warrants on January 27, 2022, which were calculated using the market price of Brasilagro’s average share price during the 90 days prior to the settlement date.

 

The unrestricted shares issued for the consideration transferred for the acquisition of control of Agrifirma are recognized in equity. The restricted shares, the Agrifirma Warrants and the Agrifirma Warrant dividends are recorded under “other liabilities” in the statement of financial position as their final amount may vary due to certain conditions set forth in the Merger Agreement and, for such reason, do not meet the definition of equity instrument in accordance with IAS 32 – Financial Instruments, and therefore are recognized as financial liabilities at fair value through profit or loss. The restricted shares are considered in the calculation of basic earnings per share, while the Agrifirma Warrants are considered potential common shares and as such included in the calculation of diluted earnings per share. See Note 1.1 to the financial statements included in this annual report.

 

Serra Grande Farm Acquisition and Partnership VII

 

In April 2020, we acquired the Serra Grande farm located in Baixa Grande do Ribeiro, in the State of Piauí. The acquisition consisted of an area of 4,489 hectares, 2,904 hectares of which are arable to be developed and are suitable for grains cultivation. The other 1,585 hectares are permanent preservation and legal reserve areas. The acquisition price was R$25.0 million, or R$8,600 per arable hectare. We made an initial payment of R$10.7 million and will make remaining payments in three equal annual installments.

 

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In addition to the acquisition, the Company has an agricultural partnership in an area of 5,473 hectares of arable and developed land, already planted and operated by the Company during the 19/20 harvest (Partnership VII). This area is contiguous to the acquired area, has more than 5 years in average of production and high production potential. Partnership VII has a term up to 12 years, with a pre-fixed call option until 2024.

 

Partnership V (3SB Produtos Agrícolas S.A.)

 

On July 11, 2018, we entered into an agricultural rural partnership agreement with 3SB Produtos Agrícolas S.A. (“Brasilagro/3SB Partnership Agreement”), which was amended on August 28, 2018. The scope of 3SB Partnership Agreement involved a total of 11 rural properties, all located in the Municipality of São Felix do Araguaia, in the State of Mato Grosso, comprising a total agricultural area of 23,615 useful hectares. 3SB Produtos Agrícolas S.A. holds the rural properties under the Brasilagro/3SB Partnership Agreement by reason of rural lease agreements that it had previously entered into with the owners of such properties. For this reason, the term of the Brasilagro/3SB Partnership Agreement varies from property to property, according to the term of each rural lease agreement entered into with each the owners. On June 1, 2019, the total agricultural area of the Brasilagro/3SB Partnership Agreement was reduced by 3,242 useful hectares. On June 13, 2019, we entered into a new rural lease agreement with the owner of Fazenda Santa Luzia and Fazenda Jataí II (following the expiration of the rural lease agreements orignially entered into with 3SB Produtos Agrícolas S.A.). Considering both the Brasilagro/3SB Partnership Agreement and the agreements that we entered into with the owner of Fazenda Santa Luzia and Fazenda Jataí II, the total agricultural area currently occupied by us in São Felix do Araguaia, in the State of Mato Grosso, is 20,138 hectares.

 

Partnership IV (Agro Serra – Agro Pecuária e Industrial Serra Grande Ltda.)

 

On February 7, 2017, we entered into two agreements for an agricultural partnership in relation to a property in São Raimundo das Mangabeiras, state of Maranhão, or Partnership IV.

 

The first agreement under Partnership IV establishes an agricultural partnership with Agro Pecuária e Industrial Serra Grande Ltda. (“Serra Grande”), which consists of a sugarcane exploration agreement of an area of around 15,000 hectares. The agricultural partnership will last for 15 years from the date of the agreement and may be extended for the same period. The amount to be paid to Serra Grande corresponds to 10% of the entire production obtained in the area referred to in the agreement and the initial volume to be produced in the area during the first year of the agreement was established at 850,000 tons. After this period, spanning between one and five years, the minimum volume to be produced in the partnership areas is 4,500,000 tons of sugarcane, and from the sixth year onward until the expiration of the agreement, the minimum production volume is 1,250,000 tons of sugarcane per crop year.

 

The second agreement under Partnership IV governs the rights and obligations of the agricultural partners, through which BrasilAgro acquired sugarcane crops planted by the agricultural partner in the areas referred to in the partnership agreement described above. This agreement meets the definition of a finance lease. As consideration, BrasilAgro undertakes to return, at the end of the agreement, the area referred to in the partnership agreement together with sugarcane stubble crops with the capacity to produce 850,000 tons of sugarcane in the crop year subsequent to the termination of the agricultural partnership agreement.

 

Brenco – Companhia Brasileira de Energia Renovável

 

In March 2008, we signed two contracts for the exclusive supply to Brenco of the entirety of our sugarcane production over two full crop cycles (for sugarcane, one full crop cycle consists of six agricultural years and five harvests). They are expected to expire in 2020, but are renewable upon the agreement of the parties. One of the contracts refers to our cultivation from an area of approximately 5,718 hectares at our Araucária farm and the other refers to approximately 3,669 hectares at our Alto Taquari farm. The price per ton, for the purpose of these agreements, is determined based on Total Recoverable Sugar, or ATR, price per ton of sugarcane effectively delivered, with ATR corresponding to the quantity of sugar available in the raw material, minus sugar content lost during the production process, multiplied by the market prices of sugar and ethanol sold by regional plants in the internal and external market, in each case, as determined by the Counsel of Sugarcane, Sugar and Alcohol Producers in São Paulo (Conselho de Produtores de Cana, Açúcar e Álcool de São Paulo, or CONSECANA). For the year ended June 30, 2020, net revenue of our sugarcane production to Brenco was R$82.8 million, representing 16.9% of our total net revenue. The purpose of the contracts is not to secure a more favorable price than the market price, since we expect that the ATR price as determined by CONSECANA will be generally equivalent to the market price, but rather to secure the sale of our sugarcane production over the long term. We believe this gives us the predictability that makes it practicable for us to grow and commercialize sugarcane, given that sugarcane crops have a productive cycle lasting six years from the first harvest. However, Brenco is facing financial difficulties and may not comply with its contractual obligations.

 

On May 8, 2015, we executed three agreements with Brenco:

 

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The first agreement consists of a rural sub partnership to operate nine farms located in the municipalities of Alto Araguaia and Alto Taquari, in the state of Mato Grosso. The sub partnership started at the date of its signature and is estimated to end on March 31, 2026. The areas are to be used for the plantation and cultivation of sugarcane, which cannot exceed the duration of the contract. This contractual partnership meets the definition of an operating lease. The payment must always be in kind (tons of sugarcane) and delivered at the mill owned by Brenco, which is located in the vicinity of the farms, during the harvest period of the product. The quantity to be paid for the duration of the contract shall be established in tons per hectare and varies according to the area being explored. According to this contract, the quantity to be paid in the long term corresponds to 529,975 tons of sugarcane, of which 174,929 tons will be paid within one to five years and 355,046 tons will be paid after more than five years up to the expiration of the agreement.

 

The second agreement relates to the regulation of rights and obligations between agricultural partners from whom BrasilAgro acquired the crops of sugarcane planted by Brenco in the properties subject to the sub partnership agreement described above. This contract meets the definition of a financial leasing. The payment must always be in kind (tons of sugarcane) and delivered at the mill owned by Brenco during the harvest period of the product. According to this contract, the quantity to be paid in the long term corresponds to 53,845 tons of sugarcane, of which 18,604 tons will be paid within one year and 35,241 tons will be paid within one to five years.

 

In the year ended June 30, 2020, we delivered a total of 840.6 million tons of sugarcane pursuant to the agreements described above.

 

The third agreement regulates the exclusive supply to Brenco of the total sugarcane production in the properties included in the sub partnership agreement for two crop cycles, one cycle shall be effective until the depletion of the already existing sugarcane crops and the other cycle consists of the sugarcane being planted by BrasilAgro.

 

In the year ended June 30, 2020 and as of the date hereof, Brenco has not defaulted on the payment of any receivable. However, we currently run the risk of default by Brenco, our main customer, associated with the fact that its controlling shareholder, Odebrecht S.A., is being investigated for corruption in the operation called “Lava Jato” (Car Wash) and the fact that Brenco filed for reorganization bankruptcy in Brazil (recuperação judicial) in May 2019. Odebrecht’s CEO has been arrested and the company has been facing the following issues: difficulties to access the credit market, decrease in its business activities, early maturity of debts, among others. Therefore, Brenco’ controlling shareholder has been cutting costs, which can adversely affect Brenco, its business and its ability to meet its payments due to us.

 

Cresca

 

On October 5, 2016, we entered into an agreement with Carlos Casado, our partner in Cresca at the time, pursuant to which we agreed to try to sell all the land that Cresca owned for a 120-day period as of the execution date of the aforementioned agreement. Further to the provisions of the agreement, we and Carlos Casado also agreed to split ownership of the land among us and Carlos Casado if either party failed to dispose of the totality of the land within the 120-day period.

 

As the properties were not sold to third-parties, on June 6 and June 8, 2017, we and Carlos Casado decided to proceed with the re-distribution of assets and liabilities of Cresca, whereby we would separate and divide the assets and liabilities of Cresca, and Cresca would distribute them to us and to Carlos Casado.

 

As a result of this transaction, we now have the following two subsidiaries that received Cresca’s assets and liabilities: (i) Palmeiras, which was incorporated to operate the activities of our investment in Cresca and (ii) Moroti, a subsidiary that has received, on February 9, 2018, upon conclusion of the process, all other assets and liabilities of Cresca attributed to BrasilAgro, including land and debts.

 

On February 9, 2018, the re-distribution of assets and liabilities of Cresca was concluded and the portion of assets and liabilities attributed to the Company was transferred to the wholly-owned subsidiary Moroti.

 

As part of the re-distribution of assets and liabilities, the Company and Carlos Casado, partners in the joint venture, decided to waive the interest for late payment on the intercompany loans taken by Cresca in the total amount of R$32.9 million, of which BrasilAgro’s share was R$16.6 million. See Note 1.6 to our financial statements for the fiscal year ended June 30, 2020.

 

As of June 30, 2020, Moroti owned 59,585 hectares of which 34,673 were arable. During the planting season for our 2019/2020 crop year, we planted 6,286 hectares of soybean, 2,196 hectares of corn, 3,167 hectares of other grains and 3,064 hectares of pasture at the farm in Paraguay.

 

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Raw Material Acquisition Risks

 

For the acquisition of farming inputs, our primary risks are foreign-exchange variations, the supply and demand of each input, farming commodity prices and freight prices. Our dependence on imported raw materials is also subject to supply and customs clearance delays. We are also subject to risks regarding the availability of the specific varieties of seeds we use, which are affected by weather conditions, among other factors.

 

In addition, the price of diesel fuel, which is the primary fuel used in farming machinery and trucks, is affected by the variation in oil prices as well as by the price-control policies adopted by the Brazilian government.

 

See “Item 3—Key Information—Risk Factors—Risks Relating to our Business and Industry” for information regarding the prohibition of the use of glyphosate and the freight rate schedule.

 

Customers

 

We currently sell a substantial portion of our total crop production to a small number of customers who have substantial bargaining power. In the year ended June 30, 2020, our three largest customers, Agro Serra, Brenco and Bunge, accounted for 60.0% of our total revenue. See “Item 3—Key Information—Risk Factors— Substantially all of our revenue is derived from a small number of customers, and we currently face a risk of default by our main customer.”

 

We did not and do not expect to renegotiate the terms of our agreements with our customers, such as extended payment terms or refund periods, or provide concessions or modify terms of arrangements and did not and do not expect to modify other contractual arrangements as a result of the COVID-19 pandemic.

 

Competition

 

The agriculture industry is composed of widely traded commodities, where the prices are freely determined based on supply and demand. The supply side is characterized by a large number of producers, each contributing a small part of the total production and thus having minimal influence over commodity prices, which are generally determined by indexes or exchanges in international markets, as is the case with soybean, the price of which is largely determined by the CBOT. Agricultural commodity producers therefore compete largely based on their production costs, and their scale of production. At the domestic level, producers compete on similar conditions, whereas at the international level, competition is affected significantly by, among other factors, government policies such as subsidies to agricultural producers, which can be substantial in developed countries.

 

Land acquisition is subject to intense competition. In this case, we compete to acquire the most appropriate land for cultivating our agricultural products. We believe that this process has contributed to an increase in land prices over the years and that the strongest competition has been from the larger groups having in-depth knowledge of the sector, management excellence and continuous objectives to increase their agricultural area portfolio. We understand that these large groups are mainly SLC Participações, operating in four Brazilian states; and Terra Santa Agro. In addition, we may face significant competition from large international companies which have greater financial resources than we do.

 

Seasonality

 

Our principal products are subject to seasonality variations between the crop season and the off-season. The off-season occurs between the end of the harvest of a crop year and the beginning of the harvest of the following crop year. Such period occurs at different parts of the year depending on the agricultural product, as follows: (i) the off-season for grains in Brazil typically occurs between August and January; (ii) the off-season for sugarcane in Brazil typically occurs between December and March; and (iii) the off-season for cattle-raising in Brazil typically occurs between September and January. Because of the reduced supply of agricultural products during each product’s respective off-season, prices for such products are typically higher during that time.

 

Throughout the year, our working capital needs vary significantly depending on the harvest period of grains, sugarcane and other crops in Brazil. Changes in the harvest periods, resulting from unfavorable weather or financial restrictions on us, have a direct impact on our inventory levels, advances to producers, loans and sales volume during the year.

 

Insurance

 

Our businesses are generally subject to a number of risks and hazards, which could result in damage to individuals, or destruction of properties, facilities and equipment. As a general rule, we believe that our insurance coverage against risks that are typical in our business is adequate and consistent with the usual practices adopted by other companies operating in the same sector in Brazil. Nevertheless, we cannot ensure that the coverage set forth in our insurance policies will suffice for purposes of protecting us from all losses and damages that may occur.

 

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We have a civil liability insurance policy that covers liability arising from compensation for damages caused to third parties in an amount of up to R$5 million. This policy is currently in force and will expire on November 19, 2020. We are negotiating with the insurance company to extend this policy.

 

We also have a business insurance policy (rural multi-risk) for storage structure (silo) and machinery located at our Chaparral farm located in Correntina, in the State of Bahia. This policy provides for different maximum indemnity coverage, depending on the insured event, such as lightning, explosion, electrical damages or windstorm. This policy is currently in force and will expire on April 2, 2021.

 

We have also a Directors and Officers (D&O) insurance policy, which covers the members of our board of directors, executive board, audit board or other body created by our bylaws or employees that hold a management position to which they have been elected or appointed, provided that such election or appointment has been ratified by competent bodies, as applicable, and that the indemnification shall always be subject to the limits provided in the respective insurance policy. Consultants, external auditors, shareholders, partners, interveners, depositaries or liquidators of the Company are not covered by this D&O insurance policy. This insurance policy covers civil liability up to R$20 million, and environmental damages up to R$20 million. This policy is currently in force and will expire on January 3, 2021.

 

We have an insurance policy that covers certain specific machinery (harvesters and planters), as well as the irrigation pivot system at our São José farm.

 

We also have an insurance policy that covers our headquarters office for fire, lighting and explosion events, as well as electric damage. This policy is currently in force and will expire on April 27, 2021.

 

Intellectual Property

 

In Brazil, title to a patent or trademark is obtained by means of the registration with the National Institute of Industrial Property (Instituto Nacional de Propriedade Industrial, or INPI). When such right is granted, the titleholder is ensured the exclusive use right thereof all over Brazil for a period of ten years, which may be renewed for successive equal periods indefinitely, as long as there is an interest in maintaining the trademark ownership.

 

Pursuant to the Brazilian legal framework, a trademark can be categorized as either a product, service, certification or collective mark. With regard to its presentation in local law, the trademarks can be nominative, mixed, figurative or three-dimensional. During the registration process, the depositor has an expectation of right to use the deposited trademarks, which he may avail himself from in order to identify its products or services until the registration process is ultimately concluded.

 

We have filed three trademark registration applications with the INPI for the trademark name (which corresponds to our current corporate name) “BrasilAgro – Companhia Brasileira de Propriedades Agrícolas” under Nos. 828045089, 828045097 and 828045100.

 

Registration No. 828045089 concerning intermediation, purchase, sale or lease of properties, land, buildings and real estate in rural and urban areas, intermediation in real estate transactions of any kind, as well as participation in other companies, in undertakings in Brazil and abroad was granted to us by the INPI on June 2, 2020 and will expire on June 2, 2026. Registration No. 828045097 concerning marketing, distribution, importation and export of agricultural and livestock products was granted to us by the INPI on June 5, 2012 and will expire on June 5, 2022. Registration No. 828045100 concerning products related to agriculture and livestock, such as agricultural products, vegetables, forestry, grains and animals, fruits, vegetables, seeds, plants and natural flowers and animal feed was granted to us by the INPI on September 20, 2016 and will expire on September 20, 2026.

 

We also have filed three trademark registration applications for the trademark name “BrasilAgro – Companhia Brasileira de Propriedades Agropecuárias,” under applications No. 827971575, 827971567 and 827971583. Registration No. 827971567 was approved on April 7, 2020 and will expire on April, 7, 2030. Reistration Nos. 827971575 and 827971583 were approved on June 14, 2011 and January 28, 2014, respectively, and will expire on June 14, 2021 and January 28, 2024, respectively.

 

In addition, we filed three trademark registration applications for the single name “BrasilAgro.” The first one, filed at INPI under No. 829541870 is a service trademark, refers to NCL (9) 35 - marketing, distribution, importation and export of agricultural and livestock products, was approved on November 1, 2011 and expires on November 1, 2021. The second one, filed under No. 829541853, refers to a product trademark, on NCL 31, involving products related to agriculture and livestock, such as agricultural products, vegetables, forestry, grains and animals, fruits, vegetables and fresh vegetables, seeds, plants and natural flowers, animal food and malt, was approved on September 20, 2016 and remains in force until September 20, 2026. Finally, the third trademark registration application for the name “BrasilAgro” had the analysis thereof postponed by means of a decision dated June 28, 2011 and is currently halted given that it is pending of evaluation of another prior trademark registration application by the INPI.

 

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Following the Merger of Agrifirma, we also became the title owner of the following trademarks: (i) Registration No. 830154647, concerning the participation in other companies as a partner or shareholder, purchase and sale of real estate, and management of real estate, which was renewed as from February 8, 2021 and will expire on February 8, 2031; (ii) Registration No 830154566, concerning coffee and cotton processing services, which was registered on November 29, 2016 and will expire on November 29, 2026; (iii) Registration No 830154620, concerning harvesting services (agricultural services), services of advice, consultancy and information on research in the field of agriculture, which was renewed as from February 8, 2021 and will expire on February 8, 2031; (iv) Registration No. 830154663, concerning buying, selling, importing, exporting and commercialization of products related to agriculture, livestock and reforestation, such as coffee, cotton, soy, corn, firewood, cattle and their derivatives, such as meat and milk, which was registered on February 14, 2012 and will expire on February 8, 2031; and (v) Registration No. 830154582, concerning transport and storage services, which was renewed as from February 8, 2021 and will expire on February 8, 2031.

 

Risk Management

 

We analyze and monitor the various risks to which our business and operations are exposed. In addition to monitoring the specific factors that directly affect our agricultural production and business operations, we also monitor the risks derived from commodity price variations for our individual agricultural products, as well as foreign-exchange variations. Through our risk management policy coordinated among our Strategic Planning department, Risk Management Committee and board of directors, we hedge our exposure to commodity price risks for our transactions through over-the-counter instruments including options and futures contracts negotiated in the commodity market and maintain our exposures within pre-established limits.

 

Cash Management

 

To the extent we are unable or decide not to deploy our capital through agricultural property acquisitions or other investments, we maintain any uninvested cash and cash equivalents in an investment fund, which holds investments in fixed income securities in short-term, liquid investments (such as bank certificates of deposit, government securities and other cash-equivalents).

 

Regulation

 

In addition to the descriptions of regulatory matters set forth below, see the description of certain legal proceedings, including judicial and administrative proceedings relating to regulatory matters, set forth in “Item 8—Financial Information—Legal Proceedings.”

 

Environmental Regulation

 

The development of our agribusiness activities depends on a number of federal, state and municipal laws and regulations related to environmental protection. We may be subject to criminal and administrative penalties, besides being obligated to restore the environment and reimburse third parties for possible damages arising from non-compliance with such laws and regulations.

 

Administrative Liability

 

Administrative liability derives from an action or omission that results in violation of the standards of preservation, protection or restoration of the environment. Federal Decree No. 6,514 of July 22, 2008 establishes a set of sanctions that may be imposed as a result of breach of environmental regulation. Such sanctions include warning, fine, destruction of the product, suspension of activities, termination of tax benefits and credit lines granted by public institutions. Fines are determined based on the relevance and economic impact of the breach and can reach R$50.0 million. See “Item 3—Key Information—Risk Factors.”

 

Civil Liability

 

Under civil law, the offender is strictly liable for any environmental damage and subject to an objective standard of care, which creates liability regardless of negligence by the offender. Consequently, we are jointly liable with any third parties providing services for us to the extent their activities cause environmental damage. Environmental regulation also permits the regulator to recover damages from the controlling entity through the chain of share ownership if the direct offender is unable to pay the related damage.

 

Criminal Liability

 

Our officers, directors, employees and agents who engage in environmental crimes are subject to criminal sanctions, including fines, prison sentences and the imposition of community service requirements.

 

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Environmental Licenses

 

Environmental licensing is required for activities utilizing environmental resources that are considered potentially pollutant, or those that may in any way cause environmental degradation. Some Brazilian states and Paraguay require licenses for agricultural and animal-raising activities.

 

The environmental licensing procedure includes authorizations to change land use, water use licenses, licenses for agriculture and livestock activities, etc. All of these licenses guarantee that activities are being carried out in compliance with environmental laws and their possible impacts are being mitigated or compensated.

 

For the Paraguay farm, we obtained licenses to change land use and licenses for agricultural and animal-raising activities for the remaining area.

 

For the Nova Buriti farm, we carry out environmental impact studies and present them as regulatory agencies to obtain that licenses. However, we are also considering alternative options, such as a conservation easement, apportionment of land for an environmental reserve area and compensation for a legal reserve area.

 

For the Preferência farm, we renew the authorization to change land use with the competent environmental agency.

  

Protected Areas

 

All rural properties in Brazil are required by law to maintain legal reserve areas. A legal reserve area is an area of each rural property where deforestation is not allowed and that is necessary for the sustainable use of natural resources, conservation and rehabilitation of ecological processes, conservation of biodiversity and shelter and protection for native fauna and flora. These areas are required in perpetuity and in some cases are recorded as such in the real estate registry.

 

It is mandatory to maintain as legal reserve at least 80% of an agricultural property located in Floresta biome within Amazonia Legal, 35% for an agricultural property in the savannah region within Amazonia Legal and 20% for an agricultural property located in other forms of native vegetation in other regions of Brazil. In Paraguay, it is mandatory to maintain as legal reserve at least 25% of all agricultural property with more than 20 hectares in forest regions and also a corridor of native vegetation of at least 100 meters for every 100 hectares of agricultural or livestock.

 

All of our properties have legal reserve areas, although a part thereof has legal reserves that are in the process of being recorded at the offices of the applicable government agency. Additionally, environmental laws protect other areas, such as permanent preservation areas.

 

Permanent preservation areas are spaces, in both public domain and private domain, where the exercise of property rights has been limited. Permanent preservation areas include the margins of any water streams, the surroundings of headwaters and of natural water reservoirs, as well as lands inclined more than 45º. It will only be possible to modify these areas through previous authorization by the competent state environmental body.

 

In addition to these areas, there are also areas for environmental compensation, and ecological corridors, which safeguard interconnection of fragments of vegetation, ensuring protection of local biodiversity. Protected areas may not be suppressed, and may be used only under a regime of sustainable forest stewardship in accordance with technical and scientific criteria set forth in applicable regulations.

 

As of June 30, 2020, 68,129 hectares, or approximately 32% of the total area of our properties, consist of protected areas.

 

Rural Environmental Register (CAR)

 

In Brazil, all rural properties are required by law (Law No. 12.651/12 and Decrees Nos. 7.830/2012 and 8.235/2014) to register with the rural environmental register (CAR). This electronic registration integrates environmental information regarding the property, deforestation control, the monitoring and combating of forests and other forms of native vegetation, as well as environmental and economic planning of rural properties. The CAR gathers environmental information for each property regarding the situation of permanent preservation areas, legal reserve areas, forests and remnants of native vegetation, restricted use areas, consolidated areas, etc.

 

This register requires the rural proprietary to regularize their environmental situation. It is a requirement to have access to credit, however, sanctions are not imposed for those who are not registered with CAR.

 

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All of our owned properties are registered or in the process of being registered with CAR.

 

Ownership of Agricultural Land in Brazil by Foreigners

 

On August 23, 2010, opinion No. LA-01, of August 19, 2010, issued by the Federal Attorney General (AGU) was approved by the President of Brazil. The opinion addresses the purchase and lease of agricultural properties by Brazilian companies controlled by foreign individuals or legal entities holding the control of the capital stock of a company that owns land in Brazil. The Federal Attorney General’s opinion provides that Brazilian companies controlled by non-Brazilians require prior authorization to purchase agricultural properties and are subject to restrictions, including the following:

 

  i. the agricultural properties shall be used for agricultural, cattle raising or industrial activities, and shall be previously approved by the Ministry of Agrarian Development or by the Ministry of Development, Industry and Foreign Trade;

 

  ii. the total area of agricultural properties owned by foreigners shall not exceed the greater of (A) one fourth of the area of the municipality where the property is located; or (B) the sum of the areas held by foreigners of the same nationality shall not exceed 40% of the area of the municipality where the property is located; and

 

  iii. the acquisition shall not exceed 100 indefinite exploration modules, which are measurement units defined by INCRA. The MEI, which are measurement units adopted by INCRA, is subject to alterations by INCRA in case of changes in the economic conditions of a given region. Currently the size of the MEI range from five to 100 hectares, depending on the region.

 

New acquisitions or new lease agreements of agricultural properties by companies controlled by non-Brazilians within the above-mentioned limits must be previously approved by INCRA. The request for the approval must be filed at the Regional Branch of INCRA (Superintendência Regional) of the State where the property is located. After that, INCRA will analyze the compliance with the above-mentioned requirements and if the transaction is approved by INCRA, it will issue a certificate of approval. The purchase and lease of agricultural properties beyond the limits of areas and percentages mentioned above require prior authorization from the Brazilian Congress.

  

In both cases, it is not possible to determine an estimated time frame for the approval procedure, since up to the date of the issuance hereof, there is no report involving the issuance of such a certificate. Moreover, for the time being, Brazilian courts have not yet ruled on the effectiveness and constitutionality of the contents of the aforementioned Attorney General’s Opinion.

 

As of June 30, 2020, approximately 58.44% of our common shares were held by foreigners.

 

On December 11, 2012, São Paulo’s General Comptroller of Justice (Corregedoria Geral de Justiça do Estado de São Paulo) issued Opinion No. 461/2012-E, establishing that entities providing notary and registrar services located in the State of São Paulo are exempt from observing certain restrictions and requirements imposed by Brazilian Federal Law No. 5,709/71 and Decree No. 74,965/74, regarding Brazilian companies with the majority of the capital stock comprised by foreigners residing outside of Brazil or legal entities incorporated abroad. In April 2013, the Regional Federal Court for the Third Region (Tribunal Regional Federal da 3ª Região – TRF) granted an injunction in the context of a claim brought by INCRA and the Federal Government against São Paulo’s General Comptroller of Justice Opinion No. 461/2012-E, suspending the effects of such opinion. In August 2013, the Regional Federal Court of the Third Region acknowledged its lack of jurisdiction to rule on such claim and sent the court records of the case to São Paulo State Appeals Court (Tribunal de Justiça do Estado de São Paulo). As a consequence of such decision, the injunction granted by the Regional Federal Court of the Third Region was set aside, and both INCRA and the Federal Government had declined on the claim. Since then, entities providing notary and registry services located in the State of São Paulo are, over again, exempt from observing certain restrictions and requirements imposed by Law No. 5,709/71 and Decree No. 74,965/74.

 

On June 25, 2014, the AGU and INCRA filed a suit with the Supreme Court (STF) against the State of São Paulo due to the decision ruled by São Paulo State Appeals Court which judged the Opinion 1 issued by AGU in 2010, unconstitutional. In this suit the stay of the preliminary order was required and, in the end, the definite annulment of Opinion 461-12-E of the Inspector General Office of São Paulo, issued on December 3, 2012. On August 7, 2014, the decision issued by Supreme Court Justice Marco Aurélio Mello, rapporteur of the process, was published, denying the injunction requested by AGU and INCRA, on the basis that the fact that more than one year and 7 months elapsed since from the issuance of the opinion of the Inspector General Office of São Paulo and the filing of the suit with STF, showing that there was no urgency in the analysis of the injunction request. In September 2016, Supreme Court Justice Marco Aurélio Mello suspended the effects of said decision issued by the São Paulo Justice Court that considered that the Opinion issued by the AGU in 2010 as unconstitutional.

 

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In addition, on April 16, 2015, the Brazilian Rural Society filed a claim for the acknowledgment of non-compliance with basic principles (ADPF) under certain provisions of the Brazilian Constitution with the Supreme Court in order to (i) declare that the paragraph 1 of article 1 of Law No. 5,709/1971 was not received by the 1988 Federal Constitution and (ii) reverse the opinion of the Federal Attorney General of 2010 (Opinion No. LA-01).

 

As of the date hereof, we are not able to provide an estimate of the timeframe for a final judgment in any of these lawsuits to be ruled by the STF.

 

C.Organizational Structure

 

The chart below illustrates our corporate structure os of September 30, 2020. All of our subsidiaries are incorporated in Brazil and Paraguay.

   

 

(1) A portion of our common shares held by Cresud are deposited with The Bank of New York Mellon in the form of ADRs (American Depositary Receipts). Includes shares held by Agro Managers, which is organized under the laws of Argentina and controlled by Cresud’s controlling shareholder (Mr. Eduardo Elsztain) and Cresud, respectively.
(2) Autonomy Master Fund Limited is controlled by Autonomy Capital (Jersey) LP, and both entities are part of the group that employs Mr. Bruno Magalhães, a member of our board of directors. Certain of the shares held by Autonomy Master Fund Limited are held as hedge for total return swap transactions entered into between Credit Suisse Securities (Europe) Limited and Autonomy Master Fund Limited. The swap transactions mature on September 27, 2021.
(3) Consolidated position of the funds managed by Charles River Capital.
(4) Cape Town LLC is controlled by Mr. Elie Horn.
(5) Other than Mr. Eduardo Elsztain.
(6) On February 9, 2018, the re-distribution of assets and liabilities of Cresca was concluded, and the portion of assets and liabilities held by us was transferred to our wholly-owned subsidiary Moroti.

 

D.Property, Plants and Equipment

 

See “—History and Development of the Company—Overview,” “—Business Overview—Agricultural Activities and Products,” “—Business Overview—Leases,” “—Business Overview—Investment Properties,” “—Business Overview—Agricultural Properties,” “—Business Overview— Environmental Regulation” and “—Business Overview—Environmental Licenses.”

 

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ITEM 4A—UNRESOLVED STAFF COMMENTS

 

There are no unresolved staff comments as of the date of this annual report.

 

ITEM 5—OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

You should read the following discussion in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this report. Our audited annual consolidated financial statements have been prepared in accordance with IFRS as issued by IASB.

 

The following discussion contains forward-looking statements that involve risks and uncertainties, in particular with respect to the COVID-19 pandemic and related effects on our historical and future results of operations and financial condition. See “Forward-Looking Statements” and “Item 3. Key Information—Risk Factors.”

 

A. Operating Results

 

Impact of the COVID-19 Pandemic

 

In December 2019, COVID-19 surfaced in Wuhan, China. The outbreak was declared a global pandemic by the World Health Organization on March 11, 2020. The speed and extent of the spread of COVID-19, and the duration and intensity of resulting business disruption and related financial and social impact are uncertain, and such adverse effects may be material to our business and operations.

 

In March 2020, we developed and implemented a plan comprised of certain measures to protect the health of our employees, prevent the spread of COVID-19 at our facilities and mitigate its effects on our operations. These measures included:

 

●the creation of a Prevention and Risk Committee to assess the overall situation, propose and revise preventive measures and actions to minimize risks, and coordinate the implementation of action plans;

 

●the adoption of a remote work policy for employees who are in certain risk groups or who work at our corporate headquarters in São Paulo;

 

●the implementation of certain measures and protocols to protect the safety of all persons involved in our operations, pursuant to the guidelines of the Brazilian Ministry of Health (Ministério da Saúde); and

 

●the adoption of contingency plans to prevent disruption in our operations.

 

All of our employees have been able to access all of our systems and company work tools remotely. The remote work arrangements that we adopted did not affect our ability to maintain our operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures.

 

Our operations in Brazil and Paraguay continued normally and, to date, we have not had had any material impact on our business and operations arising out of the COVID-19 pandemic. However, there are no recent comparable events that may guide us as to the effects of the COVID-19 pandemic, and we cannot anticipate the final effects of the COVID-19 pandemic on our business and operations until the COVID-19 pandemic is resolved.

 

See “Item 4—Information on the Company—Business Overview—Effects of the COVID-19 Pandemic,” for additional information concerning the COVID 19 pandemic. See also “Item 3—Key Information—Risk Factors—Risks Relating to our Business and Industry—We may be exposed to risks related to health epidemics and pandemics, such as the COVID-19 pandemic, which could adversely affect our business and results of operations” and “—Risks Relating to Brazil—The measures taken or to be implemented by the Brazilian government in response to the COVID-19 pandemic may have an adverse effect on our business and operations.”

 

Business Drivers and Measures

 

Brazilian Macroeconomic Environment

 

Our financial condition and results of operations are influenced by the Brazilian economic environment.

 

Brazilian GDP decreased 3.6 % in 2016, increased 1.0% in 2017, increased 1.1% in 2018, increased 1.1% in 2019 and decreased 5.9% in the first six months of 2020. Inflation, as measured by the Broad Consumer Price Index (Índice de Preços ao Consumidor Amplo), or IPCA, published by IBGE, was 6.28%, 2.95%, 3.75% and 4.31% per year in 2016, 2017, 2018 and 2019, respectively, and 0.1% in the first six months of 2020. The U.S. dollar depreciated 16.5% against the real in 2016, 1.5% in 2017, 17.1% in 2018 and 0.6% in 2019. In the six months ended June 30, 2020, the U.S. dollar appreciated 26.4% against the real. Unemployment in Brazil increased from 6.8% in January 2014 to 13.3% in June 2020. International reserves held by the Central Bank of Brazil decreased from US$376.7 billion as of September 30, 2016 to US$356.6 billion as of September 30, 2020.

 

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In September 2015, Standard & Poor’s started to review the sovereign credit risk rating of Brazil, and downgraded it to a grade below the investment grade and, since then Brazil had been successively downgraded by the three major credit rating agencies worldwide. After the downgrading on September 30, 2015, Standard & Poor’s once more reduced the credit risk rating of Brazil from BB+ to BB and, more recently, on January 11, 2018, it downgraded the sovereign credit risk rating of Brazil from BB to BB- with stable outlook, citing the delay in the approval of tax measures intended to rebalance the government budget. In February 2016, Moody’s downgraded the credit risk rating of Brazil to a grade below the investment grade, to Ba2, with negative outlook, which in April 2018 changed to a stable outlook. In February 2018, Fitch downgraded the sovereign credit risk rating of Brazil to BB negative, which was reaffirmed in August 2018, with a stable outlook, citing structural weaknesses in public finance, high government indebtedness, a poor growth outlook, political environment and issues related to corruption.

 

In 2020, the COVID-19 pandemic has significantly impacted economic activity and markets around the world, and its severity, magnitude and duration are highly uncertain, rapidly changing and difficult to predict. Actual and potential impacts of the COVID-19 pandemic on the global economy, the economies of certain countries and certain companies has led ratings agencies to review and downgrade the credit ratings of sovereigns and issuers of securities around the world. In May 2020, Fitch downgraded the sovereign credit rating of Brazil to BB- with negative outlook, citing the deterioration of the Brazilian economic environment as a result of political instability and the ongoing COVID-19 pandemic. A potential further downgrade of the ratings of Brazil, our ratings, or those of our debt securities could result in increased interest and other financial expenses related to our borrowings and debt securities and could reduce our liquidity and ability to obtain additional financing under desired terms and conditions.

 

Other Factors Affecting our Business

 

Market price variations for commodities: our principal products are subject to changes in commodities prices, including those of indexes such as the Intercontinental Exchange and the CBOT, exchange rates, as well as other indexes linked to our debts. Commodity prices are generally influenced by international, domestic and local supply and demand, which are in turn influenced by climactic and weather conditions, technology, and economic, commercial and political conditions, as well as exchange rates and transportation costs. For more information, see “Item 3—Key Information—Risk Factors—Risks Relating to our Business and Industry—Fluctuation in market prices for our agricultural products could adversely affect us” and “— Qualitative Evaluation of Market Risks.”

 

Foreign exchange: a portion of our income (loss) is linked to the exchange rate between the real and the U.S. dollar, and consequently our revenue is sensitive to foreign exchange fluctuations. Certain of our commodities, such as soybean, may be priced in reais or in U.S. dollars. In addition, certain of the raw materials necessary for farming activities, such as chemicals, pesticides and fertilizers, are priced in or based on the U.S. dollar. See “Item 3—Key Information—Exchange Rates.”

 

Inflation: inflation does not directly affect our revenue because our products are commodities whose prices are determined by reference to international commodity exchanges. Nevertheless, our labor and other operating costs are affected by inflation which directly affects our results of operations.

 

The table below sets forth certain market indices that affect our operating and financial results:

 

   Year Ended June 30,    
   2020   2019   2018   Source
Soybean Price (Paranaguá)  (R$/bag)    
Closing   115.32    81.80    86.54   Bloomberg
Exchange rate  (R$ per US$ 1.00)    
Beginning   3.82    3.90    3.30   Bloomberg
Closing   5.48    3.83    3.85   Bloomberg
Average   4.47    3.86    3.34   Bloomberg
ATR (R$/Kg of ATR)(1)   0.68    0.62    0.57   http://www.udop.com.br
Closing IGP-M (%)(2)   7.31%   6.51%   6.92%  Bloomberg
IPCA(3)   2.13%   3.37%   4.39%  Bloomberg
CDI(4)   4.59%   6.32%   7.35%  B3
NPK(5) (R$/ton)   1,362.73    1,150.28    1,248.62   Bloomberg

 

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(1)ATR corresponds to the quantity of sugar available in the raw material subtracted from the losses in the industrial process.
(2)IGP-M is published monthly by FGV.
(3)IPCA is published monthly by IBGE.
(4)The CDI rate is the average of the rates of inter-bank deposits charged during the day in Brazil (accumulated in the period).
(5)NPK is the chemical compound of farming fertilizers made up of nitrogen, phosphorus and potassium combined at a ratio of 2:20:20.

 

Principal Components of Our Statement of Operations

 

Revenue

 

Our operating revenue is derived mainly from the sale of (i) grains (comprised of soybean, corn, bean, cotton and sorghum); (ii) sugarcane; (iii) cattle and (iv) other farming products.

  

Taxes on sales

 

Taxes on sales vary depending on the product and the market, as follows:

 

Tax   Direct Export   Sale to Importer/Exporter   Domestic market
ICMS   Not levied   Not levied   Levied
PIS   Not levied   Not levied   Levied
COFINS   Not levied   Not levied   Levied
FUNRURAL   Not levied   Levied   Levied
FETHAB   Not levied   Levied   Levied

 

Below is a description of the principal taxes on sales of our products:

 

ICMS (Value-Added Tax on Sales and Services): ICMS is a state tax levied on the price of a product at an average rate of 18% for transactions within a state and 7% to 12% for transactions across states. ICMS payments are not applicable to exports of goods and services.

 

Federal Social Integration Program (Programa de Integração Social, or PIS) and Social Security Financing Contribution (Contribuição para o Financiamento da Seguridade Social, or COFINS): PIS and COFINS tax payments, levied at (i) 0.65% and 3.0% of gross revenue, respectively (cumulative) or (ii) 1.65% and 7.6%, respectively, after certain deductions (non-cumulative), depending on the business conducted and the nature of revenue earned, among other factors. PIS and COFINS payments are not applicable to exports of goods and services, or sales to import/export companies located in Brazil. Since we sell the entirety of our soybean production to such companies, such activities are not subject to PIS or COFINS payments. Brazilian law also exempts PIS and COFINS payments upon the sale of sugarcane used for the production of ethanol or biofuel, sale of maize to rural producers and manufacturers of animal feed and food and the sale of cattle.

 

Rural Workers Assistance Fund (Fundo do Produtor Rural, or FUNRURAL): Agricultural producers are subject to a tax of 2.3% to 2.85%, levied on total output sold. The FUNRURAL tax is not payable on exports of goods and services, but applies on direct sales to import/export companies located in Brazil.

 

State Fund for Transport and Housing (Fundo Estadual de Transporte e Habitação, or FETHAB) is a contribution per ton of products (soybean, corn, beans) sold in the State of Mato Grosso, as follows: R$32.41 per ton of soybean, R$9.19 per ton of corn and R$7.35 per ton of beans.

 

Gain (loss) on sale of farms

 

Upon the sale of investment property, such as our farms, we recognize in the statement of operations a gain (loss) for the difference between the sale proceeds and the carrying amount of the property sold. We account for our investment properties at cost.

  

Changes in fair value of biological assets

 

Our biological assets consist mainly of the cultivation of soybean, corn, cotton, bean, sorghum, sugarcane and cattle raising (see livestock), which are measured at fair value less cost to sell.

 

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The fair value of biological assets is determined upon their initial recognition and at each subsequent balance sheet date. Gains and losses arising from the changes in fair value of biological assets is determined as the difference between fair value and the costs incurred in the plantation and treatment of crops of biological assets at the balance sheet date, and are recorded in the statement of operations in “Changes in fair value of biological assets.” In certain circumstances, the estimated fair value less cost to sell approximate cost incurred at that moment, especially when only a minor biological transformation has taken place or when no material impact is expected from that biological transformation on the price. Biological assets continue to be recorded at their fair value.

 

The sugarcane crop productive cycle is five years on average, and for a new cycle to start depends on the completion of the previous cycle. In this regard, the current cycle is classified as biological asset in current assets, and the amount of the constitution of the bearer plant (bearer of the other cycles) are classified as permanent culture in property, plant and equipment. The calculation to estimate the value of the biological asset “sugarcane” was the discounted cash flow at a rate reflecting the risks and the terms of the operation. As a result, we projected the future cash flows in accordance with the projected productivity cycle, taking into consideration the estimated useful life of each area, the prices of total sugar recoverable, estimated productivity and the related estimated costs of production, including the cost of land, harvest, loading and transportation for each hectare planted. The soybean, corn and sorghum are temporary cultures, in which the agricultural product is harvested after a period of time spanning from 110 to 180 days after the planting date, depending on the cultivation, variety, geographic location and climate conditions. The calculation methodology used to estimate the value of the grains was the discounted cash flows at a rate reflecting the risk and terms of operations. As a result, we projected the future cash flows taking into consideration the estimated productivity, costs to be incurred based on the Company’s budget or on new internal estimates and market prices. The commodities’ prices available in futures markets, were obtained from quotes on the following boards of trade: CBOT (“Chicago Board of Trade”), the B3, and NYBOT (“New York Board of Trade”). For the agricultural products not quoted in these markets, we used the prices obtained through direct market surveys or disclosed by specialized companies. We considered the related logistic expenses and tax discounts in order to arrive at the prices of each of these products in each production unit of the Company.

 

As mentioned above, the fair value of the biological assets disclosed in the balance sheet was determined using valuation techniques – the discounted cash flows method. The data used in these methods is based on the information observed in the market, whenever possible, and if unavailable, a certain level of judgment is required to establish such fair value. Judgment is used the data to be used, e.g. price, productivity and production cost. Changes in the assumptions on these inputs might affect the fair value of biological assets.

 

Livestock

 

In 2016 the we began cattle raising operations, which typically consists of producing and selling beef calves after weaning, which characterizes the activity as breeding.

 

For segregation purposes, when applicable, the Company classifies its cattle herd into: beef cattle (current assets), which can be sold as a biological asset for meat production; and dairy cattle (non-current assets), which is used in farm operations to generate other biological assets. Up to the reporting date the Company only had beef cattle, which includes calves, heifers, cows and bulls.

 

The fair value of beef cattle is determined based on market prices, given the existence of an active market. Gain or loss from changes in the fair value of beef cattle is recognized in profit or loss for the period. The Company considered the prices in the cattle market in Bahia state and the metrics used in the market. Accordingly, beef and dairy cattle are measured based on arroba and the age bracket of animals.

 

Adjustment to net realizable value of agricultural products after harvest

 

Agricultural products from biological assets are measured at fair value when they are ready to be harvested, less selling expenses, when they are reclassified from biological assets to inventories.

 

A provision for adjustment of agricultural products to net realizable value is recognized when the fair value recorded in inventories is higher than the net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs to sell. Adjustments to net realizable value are recognized in the statement of operations in “Adjustment of net realizable value of agricultural products after harvest.”

 

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Cost of sales

 

Cost of sales for sugarcane and grains includes: (i) the historical cost of the inventories including costs of raw materials such as seeds, fertilizers, pesticides, fuels and lubricants, as well as labor, maintenance of machines and agricultural equipment, depreciation and amortization and (ii) the difference between such historical cost and the fair value of the grains and sugarcane at the time of harvest.

 

Operating expenses

 

  ● Selling expenses: selling expenses refer mainly to shipping, storage, commissions, classification of products and other related expenses.

 

  ● General and administrative expenses: general and administrative expenses refer mainly to personnel, legal counsel, depreciation and amortization, lease payments and expenses related to our headquarters.

 

Financial income and expenses

 

Financial income and expenses consist mainly of interest from financial investments, foreign exchange variations, monetary variations, interest on financial assets and liabilities and realized and unrealized gains (losses) with derivative financial instruments.

 

Income and social contribution-current and deferred taxes

 

Current and deferred income and social contribution taxes refer to taxes on net profits. We and our subsidiaries Jaborandi Agrícola Ltda., Agrifirma Bahia Agropecuária Ltda., I.A. Agro Ltda., GL Empreendimentos e Participações Ltda. and Agrifirma Brasil Agropecuária S.A. assess such taxes under the taxable income regime, with a maximum rate of 34%, consisting of: (i) income tax, at a rate of 15% of profits; (ii) income tax surcharge of 10% levied upon profits exceeding R$240,000 per year; (iii) social contribution tax on net profit, at a rate of 9%; and (iv) deferred income and social contribution taxes.

 

Our other subsidiaries assess such taxes under the presumed profit regime under which the tax base is computed as a percentage of revenue. This consists of income and social contribution taxes at a rate of 15% (plus a 10% surcharge for amounts exceeding R$240,000 per year) and 9%, respectively, levied on (i) 8% and 12%, respectively, of property sales; (ii) 32% of leases and services; and (iii) other revenue and capital gains.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with IFRS. We summarize our significant accounting policies, judgments and estimates in note 2 to our audited consolidated financial statements.

 

The critical accounting policies described herein are important to the presentation of our financial condition and results of operations, requiring the most difficult, subjective and complex judgments by our management, often as a result of the need to make estimates and assumptions about matters that are inherently uncertain. While preparing our financial statements, our management uses estimates and assumptions to record assets, liabilities and transactions. Our financial statements include different subjective and complex estimates regarding, among others, accounting for revenue recognition for grains and farm sales and related accounts receivable, determining the fair value of derivatives, biological assets and accounting for investments in investment properties, warrant, residual value and useful life of property, plant and equipment, deferred taxes, share base payment and legal claims. In order to provide a better understanding of how our management makes its judgments about future events, including the variables and assumptions underlying such estimates, we have identified the following critical accounting policies.

 

Fair value of biological assets

 

The fair value of biological assets is determined using valuation techniques, including the discounted cash flows method. The inputs for estimates are based on market information, whenever possible, and when such inputs are not available, a certain level of judgment is required to estimate the fair value. Judgment involves, for example, price, productivity, crop cost and production cost. Changes in the assumptions involving any of these factors may affect the fair value calculations of biological assets.

 

With regard to cattle, the Company values its breeding stock at fair value based on market price for the region.

 

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Residual amount and useful life of property, plant and equipment and investment properties

 

The residual amount and useful life of assets are assessed and adjusted when necessary at the end of each reporting period. The carrying amount of the asset is immediately reduced to its recoverable value if the carrying amount is estimated to exceed the recoverable value.

 

Legal claims

 

We are party to judicial and administrative lawsuits, as described in Item 8-Financial Information-Legal Proceedings. Provisions are recorded for contingencies related to judicial lawsuits that are estimated to represent probable losses (present obligations resulting from past events where an outflow of resources is probable and can be reliably estimated). The evaluation of the probability of loss includes the opinion of external legal advisors. Management believes that these contingencies are properly recorded and presented in the financial statements.

 

Revenue from contracts with customers

 

We recognize our revenue in an amount that reflects the Company’s expected consideration in exchange for the transfer of good or services to a customer when all performance obligations have been fulfilled.

 

Sale of goods

 

Our revenue from grain and sugarcane sales is recognized when performance obligations are met, which consists of transferring the significant risks and benefits of ownership of the goods are transferred to the purchaser, usually when the products are delivered to the purchaser at the determined location, according to the agreed sales terms.

 

In the case of grains, we normally perform forward contracts where the price is set up by us for the total or partial volume of grains to be sold at the delivery date, based on the calculations agreed on the selling contracts. Certain selling contracts are established in U.S. dollars where the amount in reais is also established based on the foreign exchange rate according to the sale terms. The price can also be adjusted by other factors, such as humidity and other technical characteristics of grains. Upon the grains delivery, the revenue is recognized based on the price established with each purchaser considering the foreign exchange rate on the delivery date. After the grains are delivered to the addressee, the quality and final weight are evaluated, thus determining the final price of the transaction, and adjusting the contractual amounts in accordance with such factors as well as by the foreign exchange rate variation up to the settlement date.

 

As for the sale of sugarcane, the Company generally enters into sales contracts for future delivery where data such as volume and minimum ATR are pre-fixed. The price of sugarcane takes into account the amount of ATR per ton of sugar cane delivered, and the value of the ATR, released monthly by CONSECANA.

 

Sale of farms

 

Sales of farms are not recognized until the performance obligation is met, which happens when: (i) control of the asset has been transferred; (ii) the Company has determined that it is probable the sale price will be collected; and (iii) the amount of revenue can be reliably measured. Usually these are met when the buyer makes the first down payment, and transfer of possession of the asset is completed, according to the contractual terms. The result from sales of farms is presented in the statement of operations as “Gain on sale of farm” at net value of the related cost.

 

Revenue from cattle raising

 

Revenue from the sale of beef cattle is recognized when the related performance obligations are met, which consists of transferring control of the cattle to the buyer, usually when the cattle is delivered to the buyer at a specific place, in accordance with the contractual terms.

 

The beef cattle raising business consists of the production and sale of beef calves after weaning (rearing process). Some animals that prove to be infertile may be sold to meat packers for slaughtering. At the Paraguay operations, the business consists of growing and selling these animals for slaughtering. The price for the sale of cattle is based on the market price of the arroba of fed cattle in the respective market on the transaction date, the animal weight, plus the premium related to the category. The sale of cattle in Brazil and Paraguay operations, in turn, considers the price of the arroba of fed cattle or heifer/cow on the date of sale in the respective market, applied to carcass yields.

 

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Revenue from leasing of land

 

The revenues from operating lease of land are recognized on a straight-line basis over the leasing period. When the lease price is defined in quantities of agricultural products or livestock, the lease amount is recognized considering the price of the agricultural product or livestock effective at the balance sheet date or at the date established in contract. The amounts received in advance as leasing, where applicable, are recognized in current liabilities. Leasing revenues in which a significant portion of the risks and benefits of ownership are retained by the lessor are classified as operating leases.

 

Investment properties

 

The land of rural properties purchased by us is measured at acquisition cost, which does not exceed its net realizable value and is presented in “Non-current assets.” The fair value of the investment properties are obtained through valuation reports of the farms prepared by internal experts. The valuation is carried out according to market practices. Certain factors such as location, type of soil, climate of the region, calculation of the improvements, presentation of the elements and calculation of the land value are all taken into account during the valuation process.

 

Deferred income and social contribution taxes

 

Deferred income and social contribution taxes are calculated to take into account all tax timing differences as follows: (1) income or expenses which are not yet taxable or deductible, such as gain on fair value of biological assets and provisions for contingencies, respectively; and (2) tax loss carryforwards, which have no expiration, when realization or recovery in future periods is considered probable.

 

Deferred tax assets are generated under the taxable income regime only, based on our business plan. The business plan includes consideration of a variety of factors including the 30% annual limitation for utilizing tax loss carryforwards and changes in the Brazilian economic conditions. We evaluate whether a valuation allowance is required for these assets and deferred tax assets are recognized only to the extent that is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized, otherwise a valuation allowance is recorded. We also include in our evaluation the limitation of utilizing up to only 30% of annual taxable income in connection with recognition of tax loss carryforwards.

 

Fair value of financial instruments

 

When the fair value of the financial assets and liabilities presented in the balance sheet cannot be obtained in the active market, it is determined using valuation techniques, including the discounted cash flow method. The data for such methods is based on those practiced in the market, when possible; however, when it is not viable, a certain level of judgment is required to establish the fair value. The judgment includes considerations on the data used, such as liquidity risk, credit risk, and volatility. Changes in the assumptions about these factors may affect the presented fair value of financial instruments.

 

Transactions with share-based payment

 

We measure the cost of transactions to be settled with shares with employees based on the fair value of equity instruments on the grant date. The estimate of the fair value of share-based payments requires the determination of the most adequate pricing model to grant equity instruments, which depends on the grant terms and conditions. It also requires the determination of the most adequate data for the pricing model, including the expected option life, volatility and dividend yield, and the corresponding assumptions.

 

Leases

 

We account for lease agreements in accordance with the requirements of IFRS 16 – Leases and recognize right-of-use assets and lease liabilities for the lease operations under agreements that meet the requirements of the accounting standard. In order to measure lease liabilities, our management considers only the minimum fixed lease payments. The measurement of lease liabilities corresponds to the total future payments of leases and rentals, adjusted to present value, considering the incremental borrowing rate.

 

New standards, amendments and interpretations of standards

 

New or amended pronouncements applied for the first time in the current fiscal year

 

We applied for the first time the standards IFRS 16 – Leases and IFRIC 23 – Uncertainty over Income Tax Treatments at the beginning of the fiscal year ended June 30, 2020, i.e., July 1, 2019. We have not adopted any other standard, interpretation or amendment early that has been issued but is not yet effective. The nature and effect of the changes as a result of the adoption of these new accounting standards are described below.

 

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Since our fiscal year begins on July 1, the standards that were effective on January 1, 2019 were initially adopted by us at the beginning of the fiscal year ended June 30, 2020, i.e., July 1, 2019.

 

IFRS 16 – Leases

 

IFRS 16 superseded IAS 17 – Leases, IFRIC 4 – Determining whether an Arrangement contains a Lease, SIC-15 – Operating Leases—Incentives and SIC-27 – Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The IFRS 16 standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognize most leases on the balance sheet.

 

Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 does not have an impact for leases where the Company is the lessor.

 

The Company adopted IFRS 16 using the modified restrospective method, with the date of initial application of July 1, 2019.

 

The standard had significant impacts on the financial statements, since, according to the new principles introduced by IFRS 16, the Company recognized lease liabilities and right-of-use assets on the date of initial application for leases previously classified as operating leases. The Company’s main contracts are related to agricultural partnership operations and land lease, in addition to other less relevant contracts that involve the lease of machinery, vehicles and properties. See Note 13 to our financial statements.

 

The Company elected to use the transition practical expedient to not reassess whether a contract is, or contains, a lease at July 1, 2019. Instead, the Company applied the standard only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Company also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (short-term leases), and lease contracts for which the underlying asset is of low value (low-value assets).

 

The right-of-use of the asset was measured at the amount equivalent to the lease liability, adjusted by the amount of any payments made in advance or accumulated related to these leases that were recognized in the balance sheet immediately prior to the initial adoption of the standard. Lease liabilities are discounted to present value using the incremental borrowing rate of the lessee on the transition date.

 

IFRIC 23 – Uncertainty over income tax treatments 

 

The interpretation IFRIC 23 addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments.

 

The Interpretation specifically addresses the following:

 

●if the entity considers uncertain tax treatments separately;

 

●the assumptions of the entity regarding the examination of tax treatments by tax authorities;

 

●how the entity determines taxable income (tax loss), calculation bases, unused tax losses, tax credits from prior periods and tax rates;

 

●how the entity considers changes in facts and circumstances.

 

The entity must determine if it considers each uncertain tax treatment separately or jointly with one or more uncertain tax treatments. The entity must follow the approach that best provides the resolution of the uncertainty. The interpretation is valid for annual periods starting after January 1, 2019. We adopted the standard as of July 1, 2019 and concluded that there were no significant effects on our financial statements.

 

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Standards issued but not yet in force

 

Amendments to IFRS 3: Defining businesses

 

In October 2018, the IASB issued amendments to IFRS 3 regarding the definition of a business to help entities to determine if a set of activities and assets acquired is a business or not. They clarify the minimum requirements for a company, eliminate the assessment of if market participants are capable of replacing missing elements, include guidelines to help entities to evaluate if an acquired process is substantive, determine better the definitions of business and outputs and introduce a test of concentration of optional fair value. New illustrative cases were provided with the amendments.

 

Since the amendments apply prospectively to transactions or other events occurring on the date or after the first-time adoption, the Company will not be affected by these amendments on the transition date.

 

Amendments to IAS 1 and IAS 8: Definition of material omission

 

In October 2018, IASB issued amendments to IAS 1 and IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of omission in all standards, with the information material if omitting, misstating or obscuring if it could reasonably influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity

 

Such amendments are not expected to have a significant impact on our financial statements.

 

There are no other standards and interpretations issued and not yet adopted that may, in the opinion of our management, significantly impact profit or loss or shareholders’ equity disclosed by us.

 

 JOBS Act

 

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain requirements for qualifying public companies.

 

Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions, we may not be required to, among other things, provide an auditor’s attestation report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act to comply with any PCAOB rules, that, if adopted in the future, would require mandatory audit firm rotation and auditor discussion and analysis pursuant to any future audit rule promulgated by the PCAOB. These exemptions apply until we are no longer an “emerging growth company.” The JOBS Act also provides “emerging growth companies” an election to comply with new or revised accounting standards on a delayed basis for those standards that have a different effective date for public and private companies. However, such election is limited to companies that prepare their financial statements and report in accordance with accounting principles generally accepted in the United States of America. As our financial statements are prepared in accordance with IFRS, such accommodation is not available to us, and we will be required to apply new or revised accounting standards under IFRS as from the effective date established in the corresponding standard.

 

Recent Developments

 

Sale of Bananal X Farm

 

On February, 20, 2019 we entered into a commitment to purchase and sale agreement for the sale of all of the 2,160 hectares of the Bananal X Farm, a property that had been held by Agrifirma Brasil Agropecuária S.A. since October 2011 and partially leased (1,968 hectares) to Francisco Ferreira Camacho since June, 2016, located in Luís Eduardo Magalhães, in the State of Bahia, comprised of 1,714 hectares of agricultural area and 446 hectares of legal reserve and permanent preservation area. The farm had not been operated by us and was leased for the purpose of cattle raising.

 

The sale price was R$28.0 million, which was divided into seven installments, with an advance of R$2.0 million to be paid in two installments, with the first installment becoming due on February 20, 2019 and the second 30 days thereafter. The two advance installments were received and are recorded as advances from customers.

 

A disagreement with the lessee of the area upon the sale prevented its immediate recognition until our current fiscal year and reporting date, and the asset remained registered under non-current assets held for sale. In July 2020, the parties concluded the agreement, the conditions precedent were fully met and, on July 31, 2020, the ownership of the farm was transferred, consummating the sale of the Bananal X farm.

 

The conditions precedent set forth in the sale agreement were fully met on July 31, 2020 after the receipt of R$5.5 million. The nominal sale value was R$28.0 million, of which we already received R$7.5 million. The remainder of the sale price will be paid to us in three annual installments in 2021, 2022 and 2023 in the amounts of R$6.0 million, R$7.0 million and R$7.5 million, respectively.

 

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2020 Cybersecutity Incident

 

In year ended June 30, 2020, we were subject to a ransomware cyberattack that caused a partial and temporary interruption of our operations. We implemented our contingency plans, continued operating partially during the cyberattack, and progressively reconnected our operating systems following the attack.

 

Following the incident, we have taken certain additional preventative measures to address cybersecurity risks, such as review and identification of the vulnerabilities in our IT environment, review of the processes and procedures related to firewall and logical access management, including IT systems and databases, and implementation of logical access and information security controls to address the risks identified.

 

Although the source of the cyberattack could not be identified, the process and characteristics of the cyberattack could be satisfactorily identified, and we believe the procedures described above will assist us in reviewing our information technology systems to prevent further cyberattacks in the future.

 

See “Item 3. Key Information––D. Risk Factors—We were the target of a cybersecurity incident that disrupted our systems.”

 

Results of Operations

 

The following discussion of our results of operations is based on our consolidated financial statements prepared in accordance with IFRS. The discussion of the results of our business segments is based upon financial information reported for each of the segments of our business, as presented in the table below.

 

The following tables set forth operating results of each of our segments and the reconciliation of these results to our consolidated statement of income.

 

   Year Ended June 30, 2020 
   (in R$ thousands) 
           Agricultural activity 
   Total   Real estate   Grains   Cotton   Sugarcane   Cattle raising   Other   Corporate 
Net revenue   487,568    14,680    233,413    13,052    192,942    32,674    807    — 
Gain from sale of farm   61,420    61,420    —    —    —    —    —    — 
Gain (loss) on fair value of biological assets and agricultural products   160,371    —    86,373    1,373    75,861    (1,298)   (1,938)   — 
Reversal of provision for agricultural products after harvest   (4,153)   —    (4,153)   —    —    —    —    — 
Cost of sales   (483,813)   (4,876)   (245,805)   (13,529)   (184,811)   (32,436)   (2,356)   — 
Gross profit   221,393    71,224    69,828    896    83,992    (1,060)   (3,487)   — 
                                         
Operating income (expenses)                                        
Selling expenses   (14,300)   3,731    (16,247)   (282)   (1,136)   (366)   —    — 
General and administrative expenses   (43,890)   —    —    —    —    —    —    (43,890)
Other operating income   1,231    —    —    —    —    —    —    1,231 
Equity pickup   (150)   —    —    —    —    —    —    (150)
Operating income (loss)   164,284    74,955    53,581    614    82,856    (1,426)   (3,487)   (42,809)
                                         
Net financial income                                        
Financial income   375,413    146,161    11,325    886    —    —    23,053    193,988 
Financial expenses   (406,168)   (133,795)   (39,362)   (3,651)   (4,828)   (1,532)   (43,175)   (179,825)
Income (loss) before taxes   133,529    87,321    25,544    (2,151)   78,028    (2,958)   (23,609)   (28,646)
                                         
Income and social contribution taxes   (13,975)   (6,722)   (8,685)   731    (26,530)   1,006    8,027    18,198 
                                         
Net income (loss) for the year   119,554    80,599    16,859    (1,420)   51,498    (1,952)   (15,582)   (10,448)

 

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   Year Ended June 30, 2019 
   (in R$ thousands) 
           Agricultural activity 
   Total   Real estate   Grains   Cotton   Sugarcane   Cattle raising   Other   Corporate 
Net revenue   357,910    8,520    171,735    —    160,476    16,795    384    — 
Gain from sale of farm   142,812    142,812    —    —    —    —    —    — 
Gain (loss) on fair value of biological assets and agricultural products   56,718    —    18,714    2,619    34,511    1,526    (652)   — 
Reversal of provision for agricultural products after harvest   (2,040)   —    (2,040)   —    —    —    —    — 
Cost of sales   (319,214)   (1,788)   (156,656)   —    (142,303)   (17,118)   (1,349)   — 
Gross profit   236,186    149,544    31,753    2,619    52,684    1,203    (1,617)   — 
                                         
Operating income (expenses)                                        
Selling expenses   (10,536)   (35)   (10,885)   —    —    (201)   585    — 
General and administrative expenses   (38,812)   —    —    —    —    —    —    (38,812)
Other operating income   (1,064)   —    —    —    —    —    —    (1,064)
Equity pickup   1,102    —    —    —    —    —    —    1,102 
Operating income (loss)   186,876    149,509    20,868    2,619    52,684    1,002    (1,032)   (38,774)
                                         
Net financial income                                        
Financial income   310,538    93,460    13,699    —    79,232    —    11,549    112,598 
Financial expenses   (297,616)   (116,502)   (9,566)   —    (44,569)   —    —    (126,600)
Income (loss) before taxes   199,798    126,467    25,001    2,619    86,968    1,002    10,517    (52,776)
                                         
Income and social contribution taxes   (22,719)   (7,724)   (8,500)   —    —    (341)   (3,576)   26,991 
                                         
Net income (loss) for the year   177,079    118,743    16,501    2,619    (29,569)   661    6,941    (25,785)

 

   Year Ended June 30, 2018 
   (in R$ thousands) 
           Agricultural activity 
   Total   Real estate   Grains   Cotton   Sugarcane   Cattle raising   Other   Corporate 
Net revenue   244,278    5,133    97,180    —    138,143    4,081    (259)   — 
Gain from sale of farm   39,817    39,817    —    —    —    —    —    — 
Gain (loss) on fair value of biological assets and agricultural products   99,083    —    55,584    —    43,952    239    (692)   — 
Reversal of provision for agricultural products after harvest   883    —    905    —    —    —    (22)   — 
Cost of sales   (228,319)   —    (89,633)   —    (134,028)   (4,378)   (280)   — 
Gross profit   155,742    44,950    64,036    —    48,067    (58)   (1,253)   — 
                                         
Operating income (expenses)                                        
Selling expenses   (10,087)   —    (9,730)   —    —    (383)   26    — 
General and administrative expenses   (34,945)   —    —    —    —    —    —    (34,945)
Other operating income   35,432    —    —    —    —    —    —    35,432 
Equity pickup   14,671    —    —    —    —    —    —    14,671 
Operating income (loss)   160,813    44,950    54,306    —    48,067    (441)   (1,227)   15,158 
                                         
Net financial income                                        
Financial income   129,323    20,843    12,388    —    18,208    —    18,501    59,383 
Financial expenses   (137,879)   (5,158)   (6,606)   —    (20,597)   —    (18,261)   (87,257)
Income (loss) before taxes   152,257    60,635    60,088    —    45,678    (441)   (987)   (12,716)
                                         
Income and social contribution taxes   (25,919)   (20,616)   (20,430)   —    (15,531)   150    335    30,173 
                                         
Net income (loss) for the year   126,338    40,019    39,658    —    30,147    (291)   (652)   17,457 

 

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The table below shows a summary of our statement of operations for the years indicated.

 

   2020   2019   2018 
   (in R$ thousands, except share and per share information) 
CONSOLIDATED STATEMENT OF INCOME            
Revenue   487,568    357,910    244,278 
Gain on sale of farms   61,420    142,812    39,817 
Changes in fair value of biological assets and agricultural products   160,371    56,718    99,083 
Adjustments to net realizable value of agricultural products after harvest, net   (4,153)   (2,040)   883 
Cost of sales   (483,813)   (319,214)   (228,319 
Gross profit   221,393    236,186    155,742 
Selling expenses   (14,300)   (10,536)   (10,087 
General and administrative expenses   (43,890)   (38,812)   (34,945 
Other operating income (expenses) net   1,231    (1,064)   35,432 
Share of (loss) profit of a joint venture   (150)   1,102    14,671 
Operating income (loss)   164,284    186,876    160,813 
Financial income   375,413    310,538    129,323 
Financial expenses   (406,168)   (297,616)   (137,879 
Financial (expense) income, net   (30,755)   12,922    (8,566 
Profit before income and social contribution taxes   133,529    199,798    152,257 
Income and social contribution taxes   (13,975)   (22,719)   (25,919)
Net Profit for the year   119,554    177,079    126,338 
Profit attributable to equity holders of the parent   119,554    177,079    126,338 
Issued shares at the fiscal year end   62,104,301    56,888,916    56,888,916 
Basic earnings per share   2.11    3.29    2.35 
Diluted earnings per share   2.09    3.27    2.35 

 

Year Ended June 30, 2020 Compared to Year Ended June 30, 2019

 

Net revenue

 

Net revenue increased R$129.7 million from R$357.9 million for the year ended June 30, 2019 to R$487.6 million for the year ended June 30, 2020. This increase was mainly due to the following:

 

  i. Revenue from sugarcane sales: revenue from sugarcane sales increased R$32.5 million from R$160.5 million (reflecting sales of 1,781,229 tons at an average price of R$90.09 per ton) for the year ended June 30, 2019 to R$192.9 million (reflecting sales of 2,062,354 tons at an average price of R$93.55 per ton) for the year ended June 30, 2020. This represents an increase of 20.2% over the previous year, mainly resulting from the increase in average per-ton sugarcane sales price and the increase in sales volume. The increase in per-ton sugarcane price was due to the higher price of the TRS (total recoverable sugar) of sugarcane sold. In the same period, there was also an increase in the price of the TRS per ton of harvested sugarcane, from R$0.639 per kg in 2019 to R$0.672 per kg in 2020.

 

  ii. Revenue from grain sales: revenue from grain sales increased R$61.7 million from R$171.7 million for the year ended June 30, 2019 (reflecting sales of 158,454 tons at an average price of R$1,083.8 per ton) to R$233.4 million for the year ended June 30, 2020 (reflecting sales of 252,386 tons at an average price of R$1,081.3 per ton). This represented an increase of 35.9% over the previous year resulting from increases in sales volume, represented mainly by revenues from soybean and corn sales, as explained below:

 

  ● Revenue from soybean sales: revenue from soybean sales increased R$33.5 million from R$161.7 million (reflecting sales of 137,114 tons at an average price of R$1,179.45 per ton) for the year ended June 30, 2019 to R$195.2 million (reflecting sales of 166,145 tons at an average price of R$1,174.92 per ton) for the year ended June 30, 2020. This represents an increase of 20.7% over the previous year resulting from an increase in sales volume, which was a result of the increase in the number of hectares planted, in line with our strategy to continuously develop arable areas at the farms we operate.

 

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  ● Revenue from corn sales: revenue from corn sales increased R$25.0 million from R$10.0 million (reflecting sales of 21,340 tons at an average price of R$469.35 per ton) for the year ended June 30, 2019 to R$35.0 million (reflecting sales of 84,686 tons at an average price of R$413.60 per ton) for the year ended June 30, 2020. This represents an increase of 249.7% over the previous year, which was a result of the increase in the number of hectares planted, in line with our strategy to continuously develop arable areas at the farms we operate.

 

  iii. Revenue from cattle sales: cattle-raising revenue by R$15.9 million from R$16.8 million (related to the sale of 8,750 head of cattle at R$5.18 per kilo) for the year ended June 30, 2019 to R$32.7 million (related to the sale of 15,159 head of cattle at R$5.72 per kilo) for the year ended June 30, 2020. The increase in the number of head of cattle sold is a result of the maturity of the herd held by us as well as the acquisition of head of cattle in the period.

 

The table below shows a summary of the number of hectares harvested, productivity and revenues from grain and sugarcane production:

 

   Harvest (hectares)   Productivity (tons)   Revenue (in R$ thousands) 
   2020   2019   2020   2019   2020   2019 
Grain   81,905    66,899    252,386    158,454    233,413    171,735 
Sugarcane   29,169    31,832    2,062,354    1,781,229    192,942    160,476 

 

Gain on sale of farms

 

For the year ended June 30, 2020, we sold 3,199 hectares of the Jatobá and Alto Taquari Farms in the States of Bahia and Mato Grosso, respectively, for R$71.5 million at a cost of R$10.1 million, including indirect taxes. For the year ended June 30, 2019, we sold 13,011 hectares of the Jatobá and Alto Taquari Farms in the States of Bahia and Mato Grosso, respectively, for R$177.2 million at a cost of R$34.4 million, including indirect taxes.

 

Changes in fair value of biological assets and agricultural products

 

Changes in fair value of biological assets and agricultural products increased R$103.7 million from a gain of R$56.7 million for the year ended June 30, 2019 to a gain of R$160.4 million for the year ended June 30, 2020. This variation resulted mainly from the increase in the fair value of biological assets and agricultural products of grains from a gain of R$18.1 million for the year ended June 30, 2019 to a gain of R$86.3 million for the year ended June 30, 2020. Such variation was mainly due to an increase in the soybean and corn yields in relation to the previous year. In addition, the fair value of biological assets and agricultural products of sugarcane varied from a gain of R$34.5 million for the year ended June 30, 2019 to a gain of R$75.9 million for the year ended June 30, 2020. Such variation was a result of the increase in productivity due to rainfall levels.

 

Adjustments to net realizable value of agricultural products after harvest

 

We recognized an impairment of net realizable value of agricultural products after harvest of R$2.0 million for the year ended June 30, 2019. For the year ended June 30, 2020, we recognized an impairment of net realizable value of agricultural products after harvest of R$4.2 million. Such variations resulted from the decrease in the corn and soybean prices from the harvest time to the end of the respective fiscal year, mainly due to price volatility during the harvest caused by the COVID-19 pandemic.

 

Cost of sales

 

Cost of sales increased R$164.6 million from R$319.2 million for the year ended June 30, 2019 to R$483.8 million for the year ended June 30, 2020.

Changes in costs year-over-year are directly linked to the market prices of commodities at the time of harvest as well as the harvested volumes (tons), as explained below:

 

  i. Cost of soybean sold: the cost of soybean sold increased by R$58.6 million. Our average cost per ton of soybean sold increased 15.2% from R$1,077.50 per ton (corresponding to 137,114 tons at a total cost of R$147.7 million) for the year ended June 30, 2019 to R$1,241.64 per ton (corresponding to 166,145 tons at a total cost of R$206.3 million) for the year ended June 30, 2020.

 

  ii. Cost of corn sold: the cost of corn sold increased by R$23.8 million. Our average cost per ton of corn sold decreased 7.6% from R$417.81 per ton (corresponding to 21,340 tons at a total cost of R$8.9 million) for the year ended June 30, 2019 to R$385.9 per ton (corresponding to 84,686 tons at a total cost of R$32.7 million) for the year ended June 30, 2020.

 

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  iii. Cost of sugarcane sold: the cost of sugarcane increased by R$42.5 million. Our average cost per ton of sugarcane sold increased 12.2% from R$79.71 per ton (corresponding to 1,781,229 tons at a total cost of R$142.3 million) for the year ended June 30, 2019 to R$89.61 per ton (corresponding to 2,062,354 tons at a total cost of R$184.8 million) for the year ended June 30, 2020.

 

In 2020 depreciation and amortization increased by R$36.2 million from R$22.5 million in the year ended June 30, 2019 to R$58.7 million in the year ended June 30, 2020, mainly due to the amortization of the right-of-use asstes recognized upon the adoption of IFRS 16.

 

Gross profit

 

For the reasons mentioned above, our gross profit for the year ended June 30, 2020 was R$221.4 million, representing a decrease of R$14.8 million, compared to R$236.2 million for the year ended June 30, 2019.

 

Selling expenses

 

Selling expenses increased by R$3.8 million from R$10.5 million for the year ended June 30, 2019 to R$14.3 million for the year ended June 30, 2020, primarily as a result of the increase in freight and storage expenses from R$9.6 million in the year ended June 30, 2019 to R$14.5 million in the year ended June 30, 2020, due to the increase in grain sales volume in the year ended June 30, 2020, which was partially offset by the provision for expected credit losses, which, for the year ended June 30, 2020, presented a reversal of the provision resulting in a gain in the amount of R$2.4 million, while for the year ended June 30, 2019 there was an addition to the provision resulting in a loss of R$0.5 million.

 

General and administrative expenses

 

General and administrative expenses increased R$5.1 million from R$38.8 million for the year ended June 30, 2019 to R$43.9 million for the year ended June 30, 2020. This increase was primarily a result of the expenses related to personnel due to the payment of taxes related to the Long-Term Stock-Based Incentive Plan approved by the Company in 2017, the increase with service providers, due to the Agrifirma merger and of the increase of software expenses, impacted by the increase in the dollar.

 

Other operating income (expenses), net

 

For the year ended June 30, 2019, other operating expenses, net, amounted to R$1.1 million. For the year ended June 30, 2020, other operating income, net, amounted to R$1.2 million. The merger with Agrifirma impacted other operating income and expenses, mainly due to transaction costs and the changes in fair value of subscription warrants and restricted shares issued by us. Additionally, in the year ended June 30, 2020, we recognized a gain of R$6.3 million as insurance compensation due to the losses in Paraguay caused by climate conditions.

 

Equity pickup

 

For the year ended June 30, 2020 we recorded an expense of R$0.2 million compared to a gain of R$1.1 million for the year ended June 30, 2019.

 

Financial income (expenses), net

 

Financial income increased R$64.9 million from R$310.5 million for the year ended June 30, 2019 to R$375.4 million for the year ended June 30, 2020 and financial expenses increased R$108.6 million from R$297.6 million for the year ended June 30, 2019 to R$406.2 million for the year ended June 30, 2019. The variation in financial income (expenses), net is mainly attributable to:

 

  i. The decrease in the gain on remeasurement of receivables from the sales of farms and leases from R$173.0 million for the year ended June 30, 2019 to R$146.2 million for the year ended June 30, 2020 and the decrease in the loss on remeasurement of receivables from the sale of farms and leases from R$161.5 million for the year ended June 30, 2019 to R$108.6 million for the year ended June 30, 2020, which related mainly to the adjustment to the present value of such receivables. The net gain on remeasurement of receivables from the sale of farms and machinery of R$37.5 million was due to the variation in the amount to be received due to the sales of the Araucária, Alto Taquari and Jatobá Farms, totaling 3.7 million soybean bags. This variation is explained by the soybean price index, considering the Chicago Stock Exchange (CBOT), port premium (basis), exchange rate and interest rate (with reference to the CDI).

 

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  ii. The increase in foreign exchange income from R$17.1 million for the year ended June 30, 2019 to R$14.0 million for the year ended June 30, 2020 and the increase in foreign exchange expenses from R$17.7 million for the year ended June 30, 2019 to R$15.8 million for the year ended June 30, 2020, which resulted in a net loss of R$1.1 million for the year ended June 30, 2020.

 

  iii. The increase of R$91.9 million of realized and unrealized gains on derivatives transactions from R$114.3 million for the year ended June 30, 2019 to R$206.2 million for the year ended June 30, 2020 and the increase of R$155.8 million of realized and unrealized losses on derivatives transactions from R$98.6 million for the year ended June 30, 2019 to R$254.4 million for the year ended June 30, 2020. For the year ended June 30, 2020, the net result of derivative transactions was a loss of R$48.2 million, of which R$68.8 million loss is related to currency operations and R$20.9 million gain is related to operations with commodities. For the year ended June 30, 2019, derivative operations totaled R$15.7 million gain, of which R$10.1 million are related to currency operations and R$5.6 million are in operations with commodities. The derivatives result reflects the commodities hedge operations results and the impact of the exchange variation on cash, which was partially dollarized in order to maintain purchasing power with regard to inputs, investments and new acquisitions, which have a positive correlation with the U.S. dollar.

 

  iv. The increase in interest on marketable securities and receivables from R$6.1 million for the year ended June 30, 2019 to R$9.0 million for the year ended June 30, 2020.

 

  v. The increase in interest on marketable securities expenses from R$294.0 thousand for the year ended June 30, 2019 to R$1.5 million for the year ended June 30, 2020 in connection with the increase of the total amount of long-term loans and financing for farm development.

 

Income and social contribution taxes

 

We recognized income and social contribution tax expenses of R$14.0 million for the year ended June 30, 2020 and of R$22.7 million for the year ended June 30, 2019. Current income and social contribution tax expenses remained the same, at R$10.5 million for the years ended June 30, 2019 and June 30, 2020. Deferred income and social contribution tax expenses decreased from R$12.2 million for the year ended June 30, 2019 to R$3.5 million for the year ended June 30, 2020.

 

Profit for the year

 

As a result of the above, profit for the year ended June 30, 2020 decreased to R$119.6 million, compared to R$177.1 million for the year ended June 30, 2019.

 

Year Ended June 30, 2019 Compared to Year Ended June 30, 2018

 

Net revenue

 

Net revenue increased R$113.6 million from R$244.3 million for the year ended June 30, 2018 to R$357.9 million for the year ended June 30, 2019. This increase was mainly due to the following:

 

  i. Revenue from sugarcane sales: revenue from sugarcane sales increased R$22.3 million from R$138.1 million (reflecting sales of 1,681,530 tons at an average price of R$82.15 per ton) for the year ended June 30, 2018 to R$160.5 million (reflecting sales of 1,781,229 tons at an average price of R$90.09 per ton) for the year ended June 30, 2019. This represents an increase of 16.2% over the previous year, mainly resulting from the increase in average per-ton sugarcane sales price and the increase in sales volume. The increase in sugarcane sales was mainly due to the increase in average per-ton sugarcane sales price, which reflected a 5.2% increase in the CONSECANA (sugarcane price index in Brazil), from R$0.607/kg for the year ended June 30, 2018 to R$0.639/kg for the year ended June 30, 2019.

 

  ii. Revenue from grain sales: revenue from grain sales increased R$74.6 million from R$97.2 million for the year ended June 30, 2018 (reflecting sales of 105,320 tons at an average price of R$922.7 per ton) to R$171.7 million for the year ended June 30, 2019 (reflecting sales of 158,454 tons at an average price of R$1,083.8 per ton). This represented an increase of 76.7% over the previous year resulting from an increase in sales volume, which was partially offset by a decrease in sales price, represented mainly by revenues from soybean and corn sales, as explained below:

 

  ● Revenue from soybean sales: revenue from soybean sales increased R$77.9 million from R$83.8 million (reflecting sales of 74,237 tons at an average price of R$1,124.02 per ton) for the year ended June 30, 2018 to R$161.7 million (reflecting sales of 137,114 tons at an average price of R$1,179.45 per ton) for the year ended June 30, 2019. This represents an increase of 93.0% over the previous year resulting from an increase in sales volume, which was a result of the increase in the number of hectares planted mainly due to the incorporation of 23,038 hectares of the Partnership V Farm.

 

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  ● Revenue from corn sales: revenue from corn sales decreased R$3.4 million from R$13.4 million (reflecting sales of 31,083 tons at an average price of R$431.10 per ton) for the year ended June 30, 2018 to R$10.0 million (reflecting sales of 21,340 tons at an average price of R$469.35 per ton) for the year ended June 30, 2019. This represents a decrease of 25.3% over the previous year, which was a result of the decrease in productivity from 7,598 kg/hectare for the year ended June 30, 2018 to 4,808 kg/hectare for the year ended June 30, 2019, explained by poor weather conditions in Brazil and Paraguay and an unexpected wild animal invasion in the Partnership V Farm, which had its first harvest under BrasilAgro’s operation during this period.

 

The table below shows a summary of the number of hectares harvested, productivity and revenues from grain and sugarcane production:

 

   Harvest (hectares)   Productivity (tons)   Revenue (in R$ thousands) 
   2019   2018   2019   2018   2019   2018 
Grain   66,899    35,207    158,454    105,320    171,735    97,180 
Sugarcane   31,832    25,452    1,781,229    1,681,530    160,476    138,143 

 

Gain on sale of farms

 

For the year ended June 30, 2019, we sold 13,011 hectares of the Jatobá and Alto Taquari Farms in the States of Bahia and Mato Grosso, respectively, for R$177.2 million at a cost of R$34.4 million, including indirect taxes. For the year ended June 30, 2018, we sold 956 hectares of the Araucária Farm in the State of Goiás for R$52.4 million at a cost of R$12.6 million, including indirect taxes. In addition, a total of R$3.8 million was recorded in the year ended June 30, 2019 related to the sale of Fazenda Cremaq in 2015, relating to an area of 6,020 hectares that was in the process of a geo-referencing dismemberment which caused registration of the real estate to be pending. Once the registration was effected, the amount was released and recorded.

 

Changes in fair value of biological assets and agricultural products

 

Changes in fair value of biological assets and agricultural products decreased R$42.4 million from a gain of R$99.1 million for the year ended June 30, 2018 to a gain of R$56.7 million for the year ended June 30, 2019. This variation resulted mainly from the decrease in the fair value of biological assets and agricultural products of grains from a gain of R$54.9 million for the year ended June 30, 2018 to a gain of R$18.1 million for the year ended June 30, 2019. Such variation was mainly due to a decrease in the soybean and corn yields in relation to the previous year. In addition, the fair value of biological assets and agricultural products of sugarcane varied from a gain of R$43.9 million for the year ended June 30, 2018 to a gain of R$34.5 million for the year ended June 30, 2019. Such variation was a result of the decrease in productivity due to rainfall levels.

 

Adjustments to net realizable value of agricultural products after harvest

 

We recognized a reversal of impairment of net realizable value of agricultural products after harvest of R$0.9 million for the year ended June 30, 2018. For the year ended June 30, 2019, we recognized an impairment of net realizable value of agricultural products after harvest of R$2.0 million. Such variations resulted from the decrease in the corn and soybean prices from the harvest time to the end of the respective fiscal year.

 

Cost of sales

 

Cost of sales increased R$90.9 million from R$228.3 million for the year ended June 30, 2018 to R$319.2 million for the year ended June 30, 2019. Changes in costs year-over-year are directly linked to the market prices of commodities at the time of harvest as well as the harvested volumes (tons), as explained below:

 

  i. Cost of soybean sold: the cost of soybean sold increased by R$68.0 million. Our average cost per ton of soybean sold increased 0.4% from R$1,073.32 per ton (corresponding to 74,237 tons at a total cost of R$79.7 million) for the year ended June 30, 2018 to R$1,077.50 per ton (corresponding to 137,114 tons at a total cost of R$147.7 million) for the year ended June 30, 2019.

 

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  ii. Cost of corn sold: the cost of corn sold increased by R$1.0 million. Our average cost per ton of corn sold increased 30.5% from R$320.21 per ton (corresponding to 31,083 tons at a total cost of R$9.9 million) for the year ended June 30, 2018 to R$417.81 per ton (corresponding to 21,340 tons at a total cost of R$8.9 million) for the year ended June 30, 2019.

 

  iii. Cost of sugarcane sold: the cost of sugarcane increased by R$8.3 million. Our average cost per ton of sugarcane sold increased 0.2% from R$79.71 per ton (corresponding to 1,681,530 tons at a total cost of R$134.0 million) for the year ended June 30, 2018 to R$79.71 per ton (corresponding to 1,781,229 tons at a total cost of R$142,3 million) for the year ended June 30, 2019.

 

Gross profit

 

For the reasons mentioned above, our gross profit for the year ended June 30, 2019 was R$236.2 million, representing an increase of R$80.4 million, compared to R$155.7 million for the year ended June 30, 2018.

 

Selling expenses

 

Selling expenses increased R$0.4 million from R$10.1 million for the year ended June 30, 2018 to R$10.5 million for the year ended June 30, 2019, primarily as a result of the increase in freight expenses, which reflects the amount of grain sold in the period, from R$4.4 million for the year ended June 30, 2018 to R$7.2 million for the year ended June 30, 2019 with an increase in the freight rate, and also an increase in the provision for expected credit losses, which were partially offset by a decrease in expenses with storage and processing.

 

General and administrative expenses

 

General and administrative expenses increased R$3.9 million from R$34.9 million for the year ended June 30, 2018 to R$38.8 million for the year ended June 30, 2019. This increase was primarily a result of the expenses related to personnel due to the provision for the Long-Term Stock-Based Incentive Plan, the payment of bonuses and Social Security (INSS), an increase in leases and rents in general, due to the grace period agreed in the renegotiation of lease contracts, which ended last harvest, and an increase in software expenses, refering to the implementation of the esocial social security management system and to the effect of exchange rate variation on subscriptions.

 

Other operating income (expenses), net

 

For the year ended June 30, 2018, other operating income, net, amounted to R$35.4 million, which reflects the recognition of amounts incurred with the conclusion of the re-distribution of assets and liabilities of Cresca in Paraguay, in the amount of R$35.7 million, which comprise R$5.1 million of effect of fair value measurement and R$30.6 million of currency translation adjustment. For the year ended June 30, 2019, other operating expenses, net, amounted to R$1.1 million.

 

Equity pickup

 

For the year ended June 30, 2019 we recorded a gain of R$1.1 million related to the results in our investment in Cresca (compared to a gain of R$14.7 million for the year ended June 30, 2018). See “Item 4—Information on the Company—B. Business Overview—Cresca”.

 

Financial income (expenses), net

 

Financial income increased R$181.2 million from R$129.3 million for the year ended June 30, 2018 to R$310.5 million for the year ended June 30, 2019 and financial expenses increased R$159.7 million from R$137.9 million for the year ended June 30, 2018 to R$297.6 million for the year ended June 30, 2019. The variation in financial income (expenses), net is mainly attributable to:

 

  i. The increase in the gain on remeasurement of receivables from the sale of farms and machinery from R$39.3 million for the year ended June 30, 2018 to R$173.0 million for the year ended June 30, 2019 and the increase in the loss on remeasurement of receivables from the sale of farms and machinery from R$26.6 million for the year ended June 30, 2018 to R$161.5 million for the year ended June 30, 2019, which related mainly to the adjustment to the present value of such receivables. The net gain on remeasurement of receivables from the sale of farms and machinery of R$11.5 million was due to the variation in the amount to be received due to the sales of the Araucária, Alto Taquari and Jatobá Farms, totaling 3.4 million soybean bags. This variation is explained by the soybean price index, considering the Chicago Stock Exchange (CBOT), port premium (basis), exchange rate and interest rate (with reference to the CDI).

 

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  ii. The increase in foreign exchange income from R$12.0 million for the year ended June 30, 2018 to R$17.1 million for the year ended June 30, 2019 and the increase in foreign exchange expenses from R$11.8 million for the year ended June 30, 2018 to R$17.7 million for the year ended June 30, 2019, which resulted in a net loss of R$614.0 thousand for the year ended June 30, 2019.

 

  iii. The increase of R$51.3 million of realized and unrealized gains on derivatives transactions from R$62.9 million for the year ended June 30, 2018 to R$114.3 million for the year ended June 30, 2019 and the increase of R$30.3 million of realized and unrealized losses on derivatives transactions from R$68.3 million for the year ended June 30, 2018 to R$98.6 million for the year ended June 30, 2019. For the year ended June 30, 2019, the net result of derivative transactions was a gain of R$15.7 million, of which R$10.1 million is related to currency operations and R$5.6 million gain is related to operations with commodities. For the year ended June 30, 2018, derivative operations totaled R$5.3 million loss, of which R$17.8 million are a loss related to currency operations and R$12.5 million gain are in operations with commodities. The derivatives result reflects the commodities hedge operations results and the impact of the exchange variation on cash, which was partially dollarized in order to maintain purchasing power with regard to inputs, investments and new acquisitions, which have a positive correlation with the U.S. dollar.

 

  iv. The decrease in interest on marketable securities and receivables from R$14.8 million for the year ended June 30, 2018 to R$6.1 million for the year ended June 30, 2019.

 

  v. The decrease in interest on marketable securities expenses from R$1.4 million for the year ended June 30, 2018 to R$294 thousand for the year ended June 30, 2019 in connection with the decrease of the total amount of long-term loans and financing for farm development.

 

Income and social contribution taxes

 

We recognized income and social contribution tax expenses of R$22.7 million for the year ended June 30, 2019 and of R$25.9 million for the year ended June 30, 2018. Current income and social contribution tax expenses increased from R$4.9 million for the year ended June 30, 2018 to R$10.5 million for the year ended June 30, 2019. Deferred income and social contribution tax expenses decreased from R$21.0 million for the year ended June 30, 2018 to R$12.2 million for the year ended June 30, 2019.

 

Profit for the year

 

As a result of the above, profit for the year ended June 30, 2019 increased to R$177.1 million, compared to R$126.3 million for the year ended June 30, 2018.

 

B. Liquidity and Capital Resources

 

As of June 30, 2020, we held R$171.0 million in cash and cash equivalents and marketable securities. We usually hold cash and cash equivalents in Certificate of Deposits and Repurchase Agreements issued by banks rated at least AA by Moody’s and Brazilian and American treasury bonds. Of the total amount of cash and cash equivalents, approximately R$27.7 million was held in jurisdictions outside Brazil and as a result there may be tax consequences if such amounts were moved out of these jurisdictions or repatriated to Brazil. We regularly review the amount of cash and cash equivalents held outside of Brazil to determine the amounts necessary to fund the current operations of our foreign operations and their growth initiatives and amounts needed to service our Brazilian indebtedness and related obligations.

 

Throughout the year, our working capital needs vary significantly depending on the harvest period of grains, sugarcane and other crops in Brazil.

 

See “Item 4—Information on the Company—B. Business Overview—Seasonality.”

 

We believe that our current capital resources, together with our ability to obtain loans and credit facilities and, when appropriate, to raise equity in the capital markets, are sufficient to meet our present cash flow needs.

 

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Sources and Uses of Funds

 

We finance our investments both by using our own resources as well as through loans and credit facilities with development banks and governmental development agencies, under which interest rates are lower than market rates, due to the fact that such credit facilities have long-term characteristics. Our principal sources of financing are discussed below under the heading “Indebtedness and cash and cash equivalents” and our main uses of funds include acquisition of land, cultivation of sugarcane, improvements and acquisition of machinery and vehicles.

 

The investments made in the fiscal year ended June 30, 2020 totaled R$24.6 million, all of which were used for the development of land for cultivation of grains, sugarcane and pasture.

 

Cash Flows

 

Our cash flow generation from operating activities may vary from period to period depending on fluctuations in our sales and service revenue, costs of goods sold and operating income (expenses) and may also vary within such periods as a result of seasonality. Operating activities primarily refer to revenue generated from the sale of grains and sugarcane.

 

Investing activities primarily refer to the acquisition of agricultural properties, developing of such properties for cultivation, purchasing machines, and remodeling, construction and improvements to agricultural properties and sale of farms.

 

Financing activities primarily refer to loans and credit facilities, principally from development banks, for the development of new projects and the purchase of machines and equipment.

 

The table below presents our cash flows for the periods indicated.

 

   Year ended June 30, 
   2020   2019   2018 
   (in R$ thousands) 
CONSOLIDATED CASH FLOW            
Net cash flows (used in) from operating activities   69,024    51,338    (2,264)
Net cash flows (used in) from investment activities   (29,295)   21,266    (65,700)
Net cash flows from (used in) financing activities   18,451    (27,621)   125,414 
Net change in cash and cash equivalents   58,180    2,451    57,450 

 

Years ended June 30, 2020 and 2019

 

Operating activities: Net cash generated from operating activities was R$69.0 million for the year ended June 30, 2020 compared to R$51.3 million for the year ended June 30, 2019. This increase was primarily due to: (i) adjustments to reconcile profit for the year in the amount of R$160.4 million related to the adjustment of the fair value of biological assets and unrealized agricultural products in the year ended June 30, 2020, compared to R$56.7 million in the year ended June 30, 2019; (ii) adjustments to reconcile the profit for the year in the amount of R$57.3 million related to the variation in the fair value of accounts receivable for the sale of farms and other financial liabilities, compared to R$14.0 million in the year ended June 30, 2019; (iii) an increase in cash flows from biological assets and agricultural products in the amount of R$114.0 million in the year ended June 30, 2020, compared to an increase in the amount of R$3.5 million in the year ended  June 30, 2019; and (iv) an increase in the amount of R$50.7 million in cash flow from customers in the year ended June 30, 2020, due to the increase in yields and improvement in sales prices, with a positive impact on trade accounts receivable and receivables from sales of farms, compared to an increase in the amount of R$3.4 million in the year ended June 30, 2019, which were offset by (i) a decrease in the amount of R$35.7 million in cash flow from suppliers in the year ended June 30, 2020, related to higher operating expenses due to the increase in operations, compared to an increase in the amount of R$10.0 million in the year ended June 30, 2019; and (ii) a decrease in the amount of R$42.7 million with regard to leases payable due to the impact of the implementation of IFRS 16 – Leases.

 

Investing activities: Net cash used in investing activities was R$29.3 million for the year ended June 30, 2020 compared to net cash from investment activities of R$65.7 million for the year ended June 30, 2019. This variation was mainly due to: (i) additions to investment properties in the amount of R$8.0 million related to the partial payment of the Serra Grande farm acquisition; and (ii) R$16.0 million related to the opening (cleaning and preparation of the soil to plant) of new crop areas at the Moroti and Chaparral farms.

 

Financing activities: Net cash from financing activities was R$18.5 million for the year ended June 30, 2020 compared to net cash used in financing activities of R$27.6 million for the year ended June 30, 2019. This variation was mainly due to: (i) new loans in the aggregate amount of R$143.9 million, of which R$130.0 million were used to pay Agrifirma’s debt; (ii) the payment of an aggregate amount of R$57.9 million in loans entered into to finance the 2020 harvest and sugarcane invesments; and (iii) the payment of R$50 million in dividends on November 14, 2019, as approved by the annual shareholders’ meeting held on October 16, 2019.

 

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Years ended June 30, 2019 and 2018

 

Operating activities: Net cash generated from operating activities was R$51.3 million for the year ended June 30, 2019 compared to net cash used in operating activities of R$2.3 million for the year ended June 30, 2018. This change was primarily due to: (i) R$30.6 million adjustment to reconcile profit for the year related to currency translation adjustment recycled to the statement of income in connection with the process of re-distributing the assets and liabilities of a joint venture (Cresca) for the year ended June 30, 2018, which did not occour in the year ended June 30, 2019; (ii) an increase in cash flows from transactions with derivative financial instruments from cash used of R$17.0 million for the year ended June 30, 2018 to cash generated of R$19.3 million for the year ended June 30, 2019; (iii) a decrease in cash flows from changes in fair value of biological assets and agricultural products from cash used of R$99.1 millhon for the year ended June 30, 2018 to cash used of R$56.7 million for the year ended June 30, 2019; and (iv) a decrease in cash flows from inventories from cash used of R$58.4 millhon for the year ended June 30, 2018 to cash used of R$31.1 million for the year ended June 30, 2019, which was partially offset by an increase of R$103.0 in cash used in gain on sale of farms.

 

Investing activities: Net cash from investing activities was R$21.3 million for the year ended June 30, 2019 compared to net cash used in investing activities of R$65.7 million for the year ended June 30, 2018. This variation was mainly due to an investment of R$21.7 million in marketable securities and R$28.9 million of cash received from sales of farms.

 

Financing activities: Net cash used in financing activities was R$27.6 million for the year ended June 30, 2019 compared to net cash from financing activities of R$125.4 million for the year ended June 30, 2018. This variation was mainly due to: (i) a decrease of R$179.7 million in proceeds from loans, financing and debentures, due to the issuance of Agribusiness Receivables Certificates (ARC) in the aggregate amount of R$142.2 million in the year ended June 30, 2018; and (ii) an increase in cash used in payment of dividends from R$13.0 for the year ended June 30, 2018 to R$41.0 million for the year ended June 30, 2019.

 

Indebtedness and Cash and Cash Equivalents

 

Our total consolidated indebtedness (loans, financing, debentures and leases) was R$514.1 million as of June 30, 2020, compared to R$285,9 million as of June 30, 2019. Our short-term indebtedness as of June 30, 2020 amounted to R$217.3 million, compared to R$76.6 million as of June 30, 2019. Our long- term indebtedness as of June 30, 2020 was R$296.2 million, compared to R$209.2 million on June 30, 2019. Of the total indebtedness outstanding as of June 30, 2020, 57.7% consisted of long-term debt, compared to 73.2% as of June 30, 2019.

 

Our indebtedness is primarily comprised of loans and credit facilities with development banks and government agencies, by means of direct or indirect disbursements, and acquisitions payable with regard to our agricultural properties. Interest rates are generally lower than prevailing rates in Brazil, due to the fact that these credit facilities have long-term characteristics and other terms specific to the development agencies.

 

In addition, on May 25, 2018, 142,200 first issue debentures were subscribed and paid-in, not convertible into shares, to be converted into collateral, in two series, for private placement totaling R$142.2 million, of which R$85.2 million in the first series and R$57.0 million in the second series. The debentures were tied to a securitization transaction, used as guarantee for the issue of 142,200 Certificates of Agribusiness Receivables. The first series will mature on August 1, 2022, subject to interest corresponding to 106.5% of the DI Rate, and the second series will mature on July 31, 2023, subject to interest corresponding to 110.0% of the DI Rate.

 

The debentures contain certain financial covenants related to the maintenance of certain financial ratios, based on the ratio of net debt to fair value of investment properties. Failure by the Company to maintain these ratios for the period of time during which the debentures remain outstanding may lead to the acceleration of the debt. On June 30, 2020 and as of the date of this annual report, we were in compliance with these covenants.

 

All loans and financing agreements listed below are in reais and have specific terms and conditions defined in the respective contracts with governmental economic and development agencies (including the Brazilian Development Bank – BNDES and the Northeastern Development Bank – BNB) that directly or indirectly grant those loans.

 

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The table below summarizes our material outstanding loans and financing agreements as of June 30, 2020.

 

      Annual interest rates and charges - %     
   Index  2020   2019   2020   2019 
Financing for agricultural costs                       
   Fixed rate + CDI   1.80% + 100%   —    40,568    — 
   Fixed rate   —    7.00%   —    6,293 
   Fixed rate   3.90%   —    9,072    — 
   Fixed rate   6.30%   —    108,057    — 
   Fixed rate   6.34%   —    3,251    — 
   Fixed rate   —    6.14%   —    32,295 
   Fixed rate   7.64%   —    9,076    — 
                 170,024    38,588 
Financing for agricultural costs (USD)                       
   Fixed rate   7.00%   —    2,787    — 
   Fixed rate   8.50%   —    5,573    — 
                 8,360    — 
Financing for agricultural costs (Paraguayan guarani)                       
   Fixed rate   8.00%   —    7,940    — 
   Fixed rate   8.25%   8.25%   19,749    18,364 
                 27,689    18,364 
Bahia Project Financing(*)                       
   Fixed rate   3.50%   3.50%   10,023    9,612 
   Fixed rate   —    4.00%   —    2,668 
   Fixed rate   6.50%   6.50%   66    198 
   Fixed rate   7.50%   7.50%   165    497 
   Fixed rate   —    9.00%   -    15,559 
                 10,254    28,534 
Financing of working capital                       
   Fixed rate + CDI   2% + 100%    —    77,516    — 
                 77,516    — 
Financing of Machinery and Equipment – FINAME                       
   Fixed rate   7.22%   7.22%   230    321 
   Fixed rate + TJLP   —    3.73%   —    1,285 
   Fixed rate   —    8.50%   —    2,204 
   Fixed rate   —    10.50%   —    1,732 
                 230    5,542 
Financing of sugarcane                       
   Fixed rate   6.76%   6.76%   2,447    2,863 
   Fixed rate   6.14%   —    40,857    27,580 
   Fixed rate   6.34%   —    29,986      
   Fixed rate + TJLP   —    3.80%   —    10,948 
   Fixed rate   —    10.00%   —    2,091 
                 73,290    43,482 
Debentures                       
   CDI   106.50%   106.50%   88,884    91,518 
   CDI   110.00%   110.00%   59,548    61,371 
                 148,432    152,889 
(-) Transaction costs                (1,682)   (1,546)
                 514,113    285,853 
Current                217,274    76,608 
Non-current                296,839    209,245 

 

(*) Financing to raise funds for opening of crop areas and improvements at the Jatobá and Chaparral farms.

 

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Changes in loans and financing during the year ended June 30, 2020 as follows:

 

   2019   Acquisition Agrifirma   Contracting   Payment of Principal   Payment of Interest   Appropriation of Interest   Foreign Exchange Variation   Total as of
June 30,
2020		 
Agricultural Cost Financing (reais)   38,588    —    166,346    (38,185)   (1,848)   5,123    —    170,024 
Agricultural Cost Financing (Paraguayan guarani)   18,364    —    14,181    (4,017)   (1,020)   2,007    6,534    36,049 
Bahia Project Financing(*)   28,534    —    —    (16,953)   (2,864)   1,537    —    10,254 
Working Capital Financing   —    123,862    77,000    (63,777)   (65,980)   3,369    3,042    77,516 
Financing of Machinery and Equipment – FINAME   5,542    —    —    (5,346)   (481)   433    82    230 
Sugarcane Financing   43,482    —    43,482    (15,689)   (2,194)   4,208    1    73,290 
Debentures   152,889    —    —    —    (11,626)   7,169    —    148,432 
Transaction costs   (1,546)   —    —    —    —    (136)   —    (1,682)
    285,853    123,862    301,009    (143,967)   (86,013)   23,710    9,659    514,113 

 

 

(*) Financing to raise funds for opening of crop areas and improvements at the Jatobá and Chaparral farms.

 

Capital Expenditures

 

We are focused on the acquisition, development and exploration of agricultural properties and the acquisition and development of properties that we believe have significant potential for cash flow generation and value appreciation. Our total capital expenditures related to these assets for the year ended June 30, 2020 were R$24.6 million, of which R$16.0 million refer to construction in progress, mostly for the clearance of areas and R$8.5 million refer to the opening and preparation of areas for cultivation and buildings and for improvements of the farm facilities.

 

All of our capital expenditures to date have been made as planned and according to the normal course of our operations. Our capital expenditures have not had any material impact from the COVID-19 pandemic.

  

Equity

 

Our total equity excluding non-controlling interest amounted to R$1,121.6 million as of June 30, 2020 and R$880.5 million as of June 30, 2019.

 

C. Research and Development, Patents and Licenses, etc.

 

We do not currently have research and development policies and have not incurred research and development expenditures in prior years.

 

D. Trend Information

 

We expect to continue to operate in a highly competitive and regulated environment that will pose continued risks and threats to our existing businesses, placing the profitability of our assets under pressure. We expect our business to continue to be subject to the risks and uncertainties discussed in “Item 3—Key Information—Risk Factors.”

 

According to a report released in September 2020 by the United States Department of Agriculture (“USDA”), the soybean global production is forecasted at a record 369.7 million tons for the 2020/21 crop year, and Brazil’s production estimate was raised to a record 133.0 million tons. Brazilian soybean producers have already sold almost 60% of expected production at higher prices due to the weaker Brazilian real and stronger Chinese demand.

 

In addition to the information set forth in this section, additional information about the trends affecting our business can be found in “Item 5. Operating and Financial Review and Prospects—Operating Results—Business Drivers and Measures.”

 

We are not aware of any other trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our net sales or revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information to not necessarily be indicative of future operating results or financial condition.

 

For a description of the effects of the COVID-19 pandemic on our results of operations, see “—Operating Results—Impact of the COVID-19 Pandemic.”

 

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E. Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

F. Tabular Disclosure of Contractual Obligations

 

The following table summarizes our significant contractual obligations and commitments as of June 30, 2020:

 

   Maturities per period 
   Less than
One Year		   One to Two
Years		   Three to Five
Years		   More than
Five Years		   Total 
   (in R$ thousands) 
Trade accounts payable   55,603    —    —    —    55,603 
Derivative financial instruments   18,333    1,462    —    —    19,795 
Loans, financing, debentures and finance leases(1)   217,274    198,793    82,037    16,009    514,113 
Lease payables   25,849    26,200    45,330    54,984    152,363 
Transactions with related parties(2)   2,849    —    —    —    2,849 
Other liabilities   5,017    29,777    4,597         39,391 

 

(1)Interest on variable interest rate loans and financing has been computed considering the interest rate as of June 30, 2020. See “Indebtedness and Cash and Cash Equivalents.”
(2)See “Item 7—B. Related Party Transactions.”

 

On May 8, 2015, we executed three agreements with Brenco:

 

The first agreement consists of a rural sub partnership to operate nine farms located in the municipalities of Alto Araguaia and Alto Taquari, in the state of Mato Grosso. The sub partnership started at the date of its signature and is estimated to end on March 31, 2026. The areas are to be used for the plantation and cultivation of sugarcane, which cannot exceed the duration of the contract. This contractual partnership meets the definition of an operating lease. The payment must always be in kind (tons of sugarcane) and delivered at the mill owned by Brenco, which is located in the vicinity of the farms, during the harvest period of the product. The quantity to be paid for the duration of the contract shall be established in tons per hectare and varies according to the area being explored. According to this contract, the quantity to be paid in the long term corresponds to 529,975 tons of sugarcane, of which 174,929 tons will be paid within one to five years and 355,046 tons will be paid over five years up to the expiration of the agreement.

 

The second agreement relates to the regulation of rights and obligations between agricultural partners from whom BrasilAgro acquired the crops of sugarcane planted by Brenco in the properties subject to the sub partnership agreement described above. This contract meets the definition of a financial lease. The payment must always be in kind (tons of sugarcane) and delivered at the mill owned by Brenco during the harvest period of the product. According to this contract, the quantity to be paid in the long term corresponds to 53,845 tons of sugarcane, of which 18,604 tons will be paid within one year and 35,241 tons will be paid within one to five years.

 

The third agreement regulates the exclusive supply to Brenco of the total sugarcane production in the properties included in the sub partnership agreement for two crop cycles, one cycle shall be effective until the depletion of the already existing sugarcane crops and the other cycle consists of the sugarcane being planted by BrasilAgro.

 

On February 7, 2017, we entered into two agreements for an agricultural partnership in relation to a property in São Raimundo das Mangabeiras, state of Maranhão, or Partnership IV.

 

The first agreement under Partnership IV establishes an agricultural partnership with Agro Pecuária e Industrial Serra Grande Ltda. (“Serra Grande”), which consists of a sugarcane exploration agreement of an area of around 15,000 hectares. The agricultural partnership will last for 15 years from the date of the agreement and may be extended for the same period. The amount to be paid to Serra Grande corresponds to 10% of the entire production obtained in the area referred to in the agreement and the initial volume to be produced in the area during the first year of the agreement was established at 850,000 tons. After this period, spanning between one and five years, the minimum volume to be produced in the partnership areas is 4,500,000 tons of sugarcane, and from the sixth year onward until the expiration of the agreement, the minimum production volume is 1,250,000 tons of sugarcane per crop year.

 

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The second agreement under Partnership IV governs the rights and obligations of the agricultural partners, through which BrasilAgro acquired sugarcane crops planted by the agricultural partner in the areas referred to in the partnership agreement described above. This agreement meets the definition of a finance lease. As consideration, BrasilAgro undertakes to return, at the end of the agreement, the area referred to in the partnership agreement together with sugarcane stubble crops with the capacity to produce 850,000 tons of sugarcane in the crop year subsequent to the termination of the agricultural partnership agreement.

 

G. Safe harbor

 

See “Forward-Looking Statements.”

 

ITEM 6—DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management Board of Directors

 

Our board of directors is responsible for establishing our overall business plan, guidelines and policies, including our long-term strategy, and for overseeing our performance. Our board of directors is also responsible for the supervision of our executive officers.

 

Pursuant to our bylaws, our board of directors consists of a minimum of five and a maximum of nine members. Election of our directors is made at annual shareholders’ meetings. At the date of this annual report, five of our directors, namely Eduardo Elsztain, Alejandro G. Elsztain, Saul Zang, Carlos María Blousson and Alejandro Casaretto were nominated by our controlling shareholder Cresud. The members of our board are elected at the shareholders’ meeting for a term of approximately two years, reelection being permitted. A director must remain in office until replaced by a successor unless resolved otherwise at the shareholders’ meeting or by the board of directors.

 

Under Novo Mercado regulations and our bylaws, a minimum of 20% of the members of our board of directors must be independent (as such term is defined under Novo Mercado regulations). However, three directors must be independent if nine members are elected to our board. Prior to taking office, our board members are required to sign an agreement to comply with the Novo Mercado regulation.

 

Pursuant to section 19 of our bylaws, our board of directors holds mandatory meetings six times a year, and may hold extraordinary meetings, as necessary. Meetings of our board of directors are convened only if a majority of the directors are present and all board decisions are taken by a 2/3 or 3/4 majority, or by simple majority, depending on the nature of the specific matters brought to discussion.

 

Brazilian corporate law and CVM Regulation No. 282/98 allow the adoption of a cumulative vote process by the request of shareholders representing a minimum of 5% of our capital stock. Brazilian corporate law allows minority shareholders that, individually or as a group, hold at least 15% of our common shares to appoint one director, by means of a separate vote. Brazilian corporate law does not allow for the election of a member to our board of directors, unless waived by our shareholders, if that person is an employee or senior manager of one of our competitors or has an interest conflicting with ours.

 

Our board of directors is currently comprised of nine members, all of whom were elected at the general shareholders’ meeting held on October 16, 2019, and whose terms will expire at our annual shareholders’ meeting for the approval of our financial statements for the fiscal year to end on June 30, 2021. The table below sets forth the name, title and date of election of each current member of our board of directors:

 

Directors*   Title   Date of election   Age
Eduardo S. Elsztain   Chairman   October 16, 2019   60
Alejandro G. Elsztain   Director   October 16, 2019   54
Saul Zang   Director   October 16, 2019   74
Isaac Selim Sutton   Independent Director**   October 16, 2019   60
Carlos María Blousson   Director   October 16, 2019   57
Alejandro Casaretto   Director   October 16, 2019   69
João de Almeida Sampaio Filho   Independent Director**   October 16, 2019   55
Bruno Magalhães   Independent Director**   October 16, 2019   47
Camilo Marcantonio   Independent Director**   October 16, 2019   39

 

*Ms. Carolina Zang and Mr. Gastón Armando Lernoud were elected to the positions of first and second alternate members of our Board of Directors, solely in the case of a vacancy in the position of a Non-Independent member of the Board of Directors. Mr. Ricardo de Santos Freitas was elected to the position of first alternate member of our Board of Directors, in the exclusive case of vacancy of the position of Independent Member of our Board of Directors.
**Independent director as defined under the Novo Mercado regulations.

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Below is a brief biographical description of each member of our board of directors:

 

Eduardo S. Elsztain. Mr. Elsztain has been engaged in the real estate business for more than twenty-five years. He is the chairman of the board of directors of Cresud SACIFyA, IRSA Propiedades Comerciales S.A., IRSA Inversiones y Representaciones Sociedad Anónima, IDB Development Corporation Ltd., Discount Investment Corporation Ltd., Banco Hipotecario S.A., BrasilAgro Companhia Brasileira de Propriedades Agrícolas S.A., Austral Gold Ltd., and Consultores Assets Management S.A., among other companies. He also Chairs IRSA Foundation, is a member of the World Economic Forum, the Council of the Americas, the Group of 50 and the Argentine Business Association (AEA), among others. He is co-founder of Endeavor Argentina and serves as Vice-President of the World Jewish Congress. Mr. Eduardo Sergio Elsztain is a brother of Alejandro Gustavo Elsztain.

 

Alejandro G. Elsztain. Mr. Elsztain obtained a degree in agricultural engineering from Universidad de Buenos Aires. He is currently Second Vice-Chairman of Cresud SACIFyA, Executive Vice-Chairman of IRSA Inversiones y Representaciones Sociedad Anónima, Chairman at Fibesa S.A. and Vice-Chairman at Nuevas Fronteras S.A. and Hoteles Argentinos S.A. In addition, he is Chairman of the Israeli companies Gav Yam and Mehadrin and Vice-Chairman of Property & Building Corporation Ltd. He is also a Director at IDB Development Corporation Ltd., and BrasilAgro Companhia Brasileira de Propriedades Agrícolas S.A., among other companies. He is also Chairman of Hillel Foundation Argentina. Mr. Alejandro Gustavo Elsztain is a brother of Eduardo Sergio Elsztain.

  

Saul Zang. Mr. Zang obtained a law degree from the Universidad de Buenos Aires. He is a member of the International Bar Association and of the Interamerican Federation of Lawyers. He was a founding partner of Zang, Bergel & Viñes Law Firm. Mr. Zang is Vice-chairman of Cresud SACIFyA, IRSA Propiedades Comerciales S.A., Consultores Assets Management S.A., and Fibesa S.A., among other companies, and Chairman at Puerto Retiro S.A. He is also director of IDB Development Corporation Ltd., Discount Investment Corporation Ltd., Banco Hipotecario S.A., BrasilAgro Companhia Brasileira de Propriedades Agrícolas S.A., BACS Banco de Crédito & Securitización S.A., Nuevas Fronteras S.A., and Palermo Invest S.A., among other companies.

 

Isaac Selim Sutton. Mr. Sutton holds a degree in economics from the Universidade de São Paulo (USP). He was an executive officer at the Safra Group’s holding company from 1994 to 2009. He is currently a member of the Fiscal Council of Bardella S.A. Indústrias Mecânicas. He has also served on the boards of directors of Bardella S.A., DPVAT S.A., Telenorte Celular, TIM Participações S.A., Veracel Celulose S.A., BR Properties S.A., Gevisa S.A. and Celma S.A., and on the fiscal councils of TIM Sul, Têxtil Renaux and TIM Nordeste.

 

Carlos María Blousson. Mr. Blousson obtained a degree in agricultural engineering from Universidad de Buenos Aires. He has been the Chief Sales Officer of Cresud SACIFyA since 1996. Prior to joining Cresud SACIFyA, he worked as a futures and options operator at Vanexva Bursátil – Sociedad de Bolsa. Previously, he worked as a farmland manager and a technical advisor at Leucon S.A.

 

Alejandro Gustavo Casaretto. Mr. Casaretto obtained a degree in agricultural engineering from Universidad de Buenos Aires. He has served as a technical manager, farm manager, and technical coordinator at Cresud SACIFyA since 1975.

 

João de Almeida Sampaio Filho. Mr. Sampaio Filho holds a degree in economics from the Fundação Armando Álvares Penteado (FAAP) and is an agricultural producer in the states of Paraná, São Paulo and Mato Grosso. He was the President of the National Natural Rubber Commission of the Brazilian Confederation of Agriculture and Livestock (CNA) and President of the National Natural Rubber Sector Chamber. He was a member of the National Council of Agricultural Policy and the National Agricultural Academy. Mr. Sampaio was the President of the Brazilian Farmers’ Association (SRB) between 2002 and 2007, President of FARM – Mercosul’s Federation of Rural Associations and the São Paulo State Secretary for Agriculture and Supply between 2007 and 2011. He is currently a Member of Advisory and Managing Boards of companies in Brazil and the United States, Minerva S.A.’s Chief Officer of Institutional Relations and Chairman of FIESP Agribusiness Higher Council.

 

Bruno Magalhães. Mr. Magalhães has 22 years of experience in financial markets. Mr. Magalhães joined Autonomy Capital in Brazil in 2013 as a trader for the Global Macro Fund. Prior to joining Autonomy, Mr. Magalhães was a partner at Banco Brasil Plural. From 2001 to 2011, he was based in London, acting as a managing director at Standard Bank, and prior to that, for Unibanco. Bruno holds an MBA degree from IBMEC Rio, and a bachelor’s degree in electrical engineering from the Pontifícia Universidade Católica do Rio de Janeiro (PUC/RJ).

 

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Camilo Marcantonio. Mr. Marcantonio is a co-founder and portfolio manager at Charles River Capital, an asset management company. Previously, he was a strategic consultant at Bain & Company for eight years, where he worked on projects addressing strategic planning, post-merger integration, complexity management, organization, performance improvement, and supply chain management, among other areas. Mr. Marcantonio had also been a partner at Astor Group, an independent investment bank and strategic advisory firm, where he advised clients on developing strategies, identifying and executing mergers and acquisitions, raising capital and solving financial and operational challenges. Mr. Marcantonio holds a degree in electronics engineering from the Instituto Militar de Engenharia (IME), from which he received the Correia Lima medal for graduating first in his class, and an MBA degree with distinction from Harvard Business School, where he received the John L. Loeb award for outstanding record of academic achievement in the area of finance.

 

Board Committees

 

Pursuant to our bylaws, our board of directors shall elect among its members three directors to compose the Compensation Committee and a minimum of three and a maximum of four directors to compose the Executive Committee. In addition to these two statutory committees, our board of directors may establish other technical or advisory committees for a specific purpose and with specific duties, which members may or may not include our directors or executive officers. Our board of directors shall establish the rules applicable to these committees, including rules on their composition, term of office, compensation and operation. Such committees are advisory and non-deliberative in nature. The following advisory committees are currently established and active:

 

Compensation Committee

 

The Compensation Committee was established on March 1, 2012, and is composed of the following members of our board of directors, all elected on October 23, 2019 for a term of office of two years, which will end at the annual general meeting for approval of our financial statements for the fiscal year to end on June 30, 2021: (i) Alejandro G. Elsztain, (ii) Saul Zang and (iii) Isaac Selim Sutton. In accordance with our bylaws, the Compensation Committee performs consultative assistance to the Board of Directors, including with respect to the determination of the compensation and benefits to be received by our directors and executive officers. Its activities include (i) submitting proposals to the Board of Directors with respect to director and executive officer compensation, (ii) advising the Board of Directors with respect to the granting of stock options or subscription warrants to our officers and employees, and (iii) advising the Board of Directors with respect to profit sharing plans involving our executive officers and employees.

 

Executive Committee

 

The Executive Committee was established on December 13, 2011, and is composed of the following members of our board of directors, all elected on October 23, 2019 for a term of office of two years, which will end at the annual general meeting for approval of our financial statements for the fiscal year to end on June 30, 2021: (i) Eduardo S. Elsztain, (ii) Alejandro G. Elsztain and (iii) Saul Zang. In accordance with our bylaws, the Executive Committee performs consultative assistance to the Board of Directors with respect to its role as a supervisory body, advising the Board of Directors on, or periodically reviewing, certain strategic or financial aspects of our business. Its activities include (A) advising the Board of Directors with respect to (i) our business plan, (ii) changes to our authorized capital, (iii) strategic initiatives, our growth plan and investment initiatives and (iv) any investments or dispositions over R$700 thousand; (B) reviewing annually (i) our financing initiatives, including with respect to our securities, (ii) the financial implications of our financing strategy and (iii) our dividend policy; and (C) reviewing and supervising periodically (i) the necessary financing for investments or activities in excess of R$700 thousand and (ii) our accessing of the capital markets.

 

Executive Officers

 

Pursuant to our bylaws, we must have two to six executive officers who may or may not be shareholders. Our executive officers are elected by our board of directors. We currently have two executive officers, who hold the following titles: chief executive officer and chief operating officer, and chief administrative officer and investor relations officer. Our executive officers are elected for a one-year term with the possibility of reelection, and they are required to remain in office until the election of their successors. Under Novo Mercado regulation, our executive officers are also required to sign an agreement to comply with the rules of the Novo Mercado prior to taking office.

 

Our executive officers are our legal representatives and are responsible for our day-to-day management, implementation of the policies and directives set by our board of directors and other duties assigned to them under the law and our bylaws. Our executive officers are authorized to take all actions required for the operation of our business, unless the law or our bylaws specifically delegate such authority to the shareholders’ meeting or our board of directors.

 

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The table below indicates the name, title, date of election and term of office of each of our current executive officers:

 

Executive Officers   Title   Date of most recent election   End of term of current office   Age
André Guillaumon   Chief executive officer and Chief operating officer   October 21, 2020   October 2021   46
Gustavo Javier Lopez   Chief administrative officer and Investor relations officer   October 21, 2020   October 2021   53

 

At a Board Meeting held on October 21, 2020, André Guillaumon and Gustavo Javier Lopez were re-elected as Chief Executive Officer and Investor Relations Officer, respectively, with a term of office of one year until the first meeting of the Board of Directors to be held after the annual general meeting for approval of our financial statements for the fiscal year to end on June 30, 2021 or until they are dismissed or replaced by the Board of Directors.

 

Below is a brief biographical description of our executive officers:

 

André Guillaumon. Mr. Guillaumon holds a bachelor’s degree in Agricultural Engineering from the Escola Superior de Agricultura Luiz de Queiroz (ESALQ) of the Universidade de São Paulo in Piracicaba, Brazil. In 1996, he began his career at Fertibrás S.A., where he worked directly in preparing and implementing fertilizer production and sales strategies. Mr. Guillaumon also represented Fertibrás S.A. in technical forums, such as the 25th International Fertilizer Management Seminar (Chicago, USA) and at the Fertilizer Quality Commission (ANDA). Mr. Guillaumon joined our Company in August 2007 as our Chief operating officer. He became our Chief executive officer and Chief operating officer in August 2016.

 

Gustavo Javier Lopez. Mr. Lopez joined Cresud in 1999 as budget manager. Since 2004, he has served as budget manager of IRSA. Prior to joining IRSA, Mr. Lopez also worked for the Argentine company Estancias Unidas del Sud as its budget analyst and as accountant for Loma Negra. He received an accounting degree from the Universidad de Buenos Aires. Mr. Lopez joined our Company in 2005 as our Chief administrative officer. He became our Chief administrative officer and Investor relations officer in August 2016.

 

Agreements with our Directors and Executive Officers

 

We are not party to any agreement or obligations involving the members of our board of directors and our executive officers.

 

Family Relationship among our Directors and Officers

 

Eduardo S. Elsztain, the chairman of our board of directors, and Alejandro G. Elsztain, a member of our board of directors, are brothers.

 

Saul Zang, who is a member of our board of directors, is Carolina Zang’s father.

 

B. Compensation

 

Pursuant to our bylaws, the total amount of compensation paid to the members of our board of directors, fiscal council and executive officers, in the aggregate, is set annually at the general shareholders’ meeting. Our directors, pursuant to the recommendation of the compensation committee, allocate the aggregate compensation among our executive officers and directors. Although our executive officers and board of directors are entitled to fixed compensation and a bonus depending on individual and company performance, the compensation of the fiscal council members is fixed. The bonus is paid to our executive officers and directors based on the achievement of certain individual and company targets.

 

The aggregate compensation paid to our executive officers and members of our board of directors (including for service as members of the compensation committee and executive committee) in the 2020 fiscal year was R$11.9 million, comprised of a fixed amount of R$3.8 million, a bonus paid to our executive officers and members of our board of directors in the amount of R$7.1 million and R$1.1 million as share-based compensation paid to our executive officers pursuant to our Long Term Incentive Plan based on Shares. The bonus to the board or directors was paid based on a recommendation of our compensation committee. The fixed amount paid to the members of our fiscal council in the 2020 fiscal year was R$0.3 million.

 

Neither we nor our subsidiaries have set aside any amount to provide pension, retirement or similar benefits.

 

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Stock Option Plan

 

Our stock option plan was approved on October 29, 2008 for the benefit of the directors, executive officers and selected employees of our Company and our directly and indirectly controlled entities, and is limited to (2%) of our capital stock, including all outstanding stock options (vested and unvested). Our board of directors manages our stock option plan and grants stock options subject to the limits and restrictions of applicable regulation, our by-laws and the guidelines set forth in the shareholders’ meeting that approved it. Our board of directors approved our first grant of stock options under the plan on August 11, 2010, with options with an exercise price of R$8.97 per share, which vested on August 11, 2012 and could be exercised within three years thereafter. Our board of directors approved our second grant of stock options under the plan on July 3, 2012, with options with an exercise price of R$8.25 per share, which vested on July 3, 2012 and may be exercised within five years thereafter. Our board of directors approved our third grant of stock options under the plan on September 4, 2012, with options with an exercise price of R$8.52 per share, which vested on September 4, 2014, and may be exercised within three years thereafter. No stock options have been granted since September 5, 2012. In August 2015, our executive officers exercised stock options granted in the first tranche representing 233,689 shares of our capital stock, which were delivered to them in October 2015. In September 2017, our executive officers exercised stock options representing 218,108 shares of our capital stock, representing the remaining stock options granted from the first, second and third tranches, which were delivered to them on October 2017. As of June 30, 2020, no additional stock options had been exercised under either the second or third tranches. We do not expect to grant any further stock options under our stock option plan.

  

Long Term Incentive Plan based on Shares

 

Our Long-Term Stock-Based Incentive Plan, or the Plan, was approved at the general meeting of our shareholders held on October 2, 2017. Executive officers and other key employees are eligible for the Plan, however, members of the Board of Directors are not eligible.

 

In establishing the Plan, the Company seeks to foster the achievement of the Company’s objectives, to strengthen the participants’ commitment in achieving certain pre-established goals. Since the elected participants receive shares issued by us, this causes them to aim at improving the results the Company and also results in the appreciation of the price of our common shares, thereby aligning the employees’ long-term interests with the Company’s. Finally, there is a long-term alignment of interests, since the vesting period and the potential for valuation of our common shares under the Plan also encourage participants to generate better long-term results, as well as to remain as employees of the Company. The Plan helps retain key executives and key employees for a longer period, which is fundamental to the Company’s long-term management and strategies.

 

The Long-Term Stock-Based Incentive Program No. 1, or Program No. 1, was established under the Plan and was duly approved at the Board of Directors meeting held on June 18, 2019. Program No. 1 was approved with the purpose of establishing a share bonus to the participants of the program to: (i) stimulate the expansion, success and achievement of the Company’s objectives; (ii) encourage participants to contribute substantially to the Company’s success; (iii) align the interests of the Company’s shareholders with those of the participants; (iv) provide the Company with a competitive differential in relation to the market with respect to variable compensation; and (v) encourage the retention of key executives and key employees of the Company. The shares to be granted under Program No. 1 will only be delivered to the elected participants if and as long as the key performance indicators (KPIs), the time limits and other conditions described in the program. The maximum potential number of shares that each participant received varied depending on the dividends declared by the Company during the vesting period of Program No. 1, the position held by each participant and other applicable conditions. The vesting period of Program No.1 started on October 2, 2017 and ended on October 1, 2019.

 

C. Board Practices

 

For information about the date of expiration of the current term of office and the period during which each director and executive officer has served in such office, see “Item 6—Directors, Senior Management and Employees—A. Directors and Senior Management.”

 

Neither we nor any of our subsidiaries have entered into a service contract with any of our directors that provide for benefits upon termination of employment.

 

Fiscal Council

 

Under Brazilian corporate law, the Conselho Fiscal, or fiscal council, is a corporate body independent of our management and our independent auditors. Its primary responsibilities are monitoring management activities, reviewing our financial statements, and reporting its findings to our shareholders.

 

Under an exemption pursuant to Rule 10A-3 under the Exchange Act regarding the audit committees of listed companies, a fiscal council may exercise the required duties and responsibilities of a U.S. audit committee to the extent permissible under the Brazilian corporate law.

 

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To comply with Rule 10A-3, the fiscal council must meet certain standards, including the following: (i) it must be separate from the full board of directors; (ii) no executive officer may be a member; and (iii) Brazilian law must set forth standards for the independence of the members. The fiscal council must also, to the extent permitted by Brazilian law, among other things: (A) be responsible for establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls or auditing; (B) have the authority to engage independent counsel and other advisors as it deems necessary to carry out its duties; and (C) receive appropriate funding from the company for payment of compensation to the external auditors and advisors as well as ordinary administrative expenses.

 

We have modified our fiscal council to comply with the exemption requirements. Accordingly, the fiscal council operates pursuant to its charter (regimento interno), which contemplates the activities described above to the extent permitted by Brazilian law and is compliant with the requirements of the Sarbanes-Oxley Act and the applicable regulations and requirements of the SEC. Because Brazilian corporate law does not permit the board of directors to delegate responsibility for the appointment and removal of the external auditors and does not provide the fiscal council with the authority to resolve disagreements between management and the external auditors regarding financial reporting, the fiscal council cannot perform these functions.

 

However, the fiscal council’s charter (regimento interno) provides the fiscal council with the authority to submit recommendations to the board of directors for the appointment or removal of the external auditors and their compensation.

 

Pursuant to our bylaws, our fiscal council is permanent. The fiscal council’s members are elected at the annual shareholders’ meeting with a term of office that extends through the following annual shareholders’ meeting. Our fiscal council shall be composed of three to five effective members and their alternates, who may or may not be shareholders. All members of our fiscal council are also required to sign an agreement to comply with the Novo Mercado rules prior to assuming their roles.

 

In addition, minority shareholders representing a minimum of 10% of our voting shares are entitled to elect one fiscal council member and his or her alternate by a separate vote. Our fiscal council must not have members of our board of directors, our executive officers, or our employees or of any subsidiary or a company under common control with us, or spouses or close family members of our directors and officers. Brazilian corporate law requires fiscal council members to receive a remuneration of at least 10% of the average annual amount paid to our officers, which excludes benefits and other allowances, or profit sharing, if any.

 

Our fiscal council is currently composed of three members and three alternates.

 

The table below indicates the name, title, date of election and term of office of each current member of our fiscal council:

 

Fiscal Council Members   Position   Date of Election   End of Current Term
Fabiano Nunes Ferrari   Fiscal Council member   October 16, 2020   October 16, 2021
Ivan Luvisotto Alexandre   Fiscal Council member   October 16, 2020   October 16, 2021
Débora de Souza Morsch   Fiscal Council member   October 16, 2020   October 16, 2021
Maurício Bispo de Souza Dantonio   Fiscal Council alternate member   October 16, 2020   October 16, 2021
Marcos Paulo Passoni   Fiscal Council alternate member   October 16, 2020   October 16, 2021
Ruan Alves Pires   Fiscal Council alternate member   October 16, 2020   October 16, 2021

 

Below is a brief biography of each member and alternate member of our fiscal council:

 

Fabiano Nunes Ferrari. Mr. Ferrari holds a Law degree from the Catholic University of São Paulo (PUC-SP) and is a partner at Suchodolski Law Firm, specialized in the fields of Corporate Law, International Law, Foreign Investments, Mergers and Acquisitions and Contracts and Agreements. In the corporate law area, he has worked in several takeovers, joint ventures and corporate restructurings. He was formerly a lawyer at the Bryan Cave LLP law firm in New York and is a member of the International Bar Association.

 

Ivan Luvisotto Alexandre. Mr. Alexandre holds a Law degree from the University of São Paulo (USP) and a specialist degree in Accountability applied to Law from the Getúlio Vargas Foundation in São Paulo (FGV-SP), as well as a specialist degree in Information Technology Law from the Fundação Getúlio Vargas in São Paulo (FGV-SP). He is a partner at Suchodolski Law Firm, with extensive experience in corporate planning and consultancy, M&As, international agreements and transactions, having assisted Brazilian and foreign companies in structuring their investments in Brazil or abroad. He has also been the Legal Director of the Brazil-Israel Chamber of Commerce and Industry since 2010.

 

Débora de Souza Morsch. Ms. Morsch graduated in Civil Engineering and Administration from Universidade Federal do Rio Grande do Sul (UFRGS). Ms. Morsch has a specialist degree in Capital Markets from Associação dos Analistas e Profissionais de Investimento do Mercado de Capitais (Apimec- UFRGS) and in Construction Management from UFRGS. Ms. Morsch is a partner and director at Zenith Asset Management and has been a member of the board of Electro Aço Altona S/A.

 

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Maurício Bispo de Souza Dantonio. Mr. Dantonio holds a law degree from the Pontifical Catholic University of São Paulo (PUC/SP) and a graduate degree in business law from the Getúlio Vargas Foundation. He is a lawyer at Suchodolski Advogados and practies in the areas of corporate law, contract law and civil litigation.

 

Marcos Paulo Passoni. Mr. Passoni holds a Law degree from the Catholic University of São Paulo and a Master degree in Diffuse Rights from Unimes. He is a partner at Suchodolski Law Firm and specializes in the fields of Civil Law and Litigation. He was a member of the board of OAB-SP (the Bar Association of the State of São Paulo). He is also a professor of Civil Litigation Procedure in the Superior School of Advocacy.

 

Ruan Alves Pires. Mr. Pires is a partner and analyst at Charles River Capital. He joined Charles River Capital in 2013, where he was the Compliance and Risk Officer, and currently works in the stock analysis area. He holds a degree in mechanical and automotive engineering from the Military Engineering Institute (IME) in Rio de Janeiro.

 

For information about the compensation committee, see “Item 6—Directors, Senior Management and Employees—Directors and Senior Management—Board Committees.”

 

D. Employees

 

The table below shows the evolution of the total number of our employees for the period indicated:

 

   As of June 30, 
Location  2020   2019   2018 
Head Offices/São Paulo   83    60    53 
Araucária Farm   10    10    8 
Alto Taquari Farm (and Partnership III Farm)   10    9    9 
Chaparral Farm   33    48    23 
Nova Buriti Farm   2    3    2 
Jatobá Farm   31    21    27 
Preferência Farm   19    18    15 
Partnership II   8    6    10 
Partnership V   27    34    — 
São José Farm (and Partnership IV Farm)   96    158    98 
Arrojadinho Farm   6    —    — 
Serra Grande Farm (and Partnership VII Farm)   4    —    — 
Total   329    367    245 

 

   As of June 30, 
Location  2020   2019   2018 
Head Offices/São Paulo   83    60    53 
Goiás   —    17    8 
Mato Grosso   47    36    9 
Bahia   89    87    65 
Piauí   12    6    10 
Maranhão   96    158    98 
Minas Gerais   2    3    2 
Total   329    367    245 

 

All of our employees are located in Brazil, and we do not employ a material number of temporary employees.

 

Compensation and benefits

 

Our compensation policy for our employees is based on legal and market rates of compensation, as well as merit-based increases in individual employees’ compensation, based on individual goals set for such employees and administered and monitored by our human resources department. We are also party to agreements, entered into with unions representing our employees, providing for employee profit-sharing arrangements (programa de participação nos resultados), pursuant to which all of our employees receive annual bonuses based on our financial and operating results, as well as personal goals set for individual employees. Finally, we also seek to retain quality personnel through offering benefits such as health and dental care, life insurance, meal vouchers, transportation and lodging, as well as job and technical training and subsidies for post-graduate, business administration and language courses. We also employ security officers at each of our agricultural properties, in an effort to maintain safe working conditions for employees contracted through our third-party service providers, including through regular workplace safety training programs.

 

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Relationship with unions

 

We believe we have good relationships with our employees and the unions that represent them. The table below summarizes the agreements entered into between us and the unions representing our employees as of June 30, 2020.

 

Branch Office   Union   Agreement(s)   Agreement
Expiration Date
Head Office   Sindicato dos Trabalhadores Rurais de São Paulo   Profit Sharing Program Overtime compensation(1)   Feb. 1, 2021
Chaparral   Confederação Nacional dos Trabalhadores Assalariados Rurais   Profit Sharing Program Overtime compensation(1)   Mar. 1, 2021
Jatobá   Confederação Nacional dos Trabalhadores Assalariados Rurais   Profit Sharing Program Overtime compensation(1)   Mar. 1, 2021
Preferência   Confederação Nacional dos Trabalhadores Assalariados Rurais   Profit Sharing Program Overtime compensation(1)   Mar. 1, 2021
Partnership II   Confederação Nacional dos Trabalhadores Assalariados Rurais   Profit Sharing Program Overtime compensation(1)   Under negotiation
Araucária   Federação dos Trabalhadores na Agricultura do Estado de MT   Profit Sharing Program Overtime compensation(1)   May 1, 2021
Alto Taquari   Federação dos Trabalhadores na Agricultura do Estado de MT   Profit Sharing Program Overtime compensation(1)   May 1, 2021
São José   Sindicado dos Trabalhadores Rurais de São Raimundo das Mangabeiras   Profit Sharing Program Overtime compensation(1)   May 1, 2021
Nova Buriti   Sindicato dos Trabalhadores Rurais de São Paulo   Profit Sharing Program Overtime compensation(1)   May 1, 2021
Partnership V   Sindicato dos Trabalhadores Rurais de Sâo Feliz do Araguaia   Profit Sharing Program Overtime compensation(1)   May 1, 2021

 

(1)Refers to offsetting overtime with down time instead of paying overtime compensation (“banco de horas”) in accordance with Brazilian law.

 

E. Share Ownership

 

The following table indicates the number of our common shares and stock options directly held by each of our directors, executive officers and members of fiscal council as of October 19, 2020.

 

Name  Number of Common Shares  

Percentage of Shares

Outstanding

  

Stock Options awarded and

not exercised

 
Executive Officers            
André Guillaumon   213,729    *                
Gustavo Javier Lopez   39,924    *      
Directors               
Eduardo S. Elsztain (1)   19,910,900    32.06      
Alejandro G. Elsztain   189,400    *      
Saul Zang   100    *      
Isaac Selim Sutton   100    *      
João de Almeida Sampaio Filho   100    *      
Camilo Marcantonio   —    —      
Carlos María Blousson   —    —      
Alejandro Casaretto   —    —      
Bruno Magalhães   —    —      
Fiscal Council Members               
Fabiano Nunes Ferrari   —    —      
Ivan Luvisotto Alexandre   —    —      
Débora de Souza Morsch   1,000    *      

 

* Represents less than 1%.

 

(1)Includes shares held of record by Cresud, Eduardo Elsztain and Agro Managers. See “Item 7—Major Shareholders and Related Party Transactions.”

 

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Our directors, executive officers and members of our Fiscal Council do not have different voting rights.

 

For information about our Stock Option Plan, see “Item 6—Directors, Senior Management and Employees—Compensation—Stock Option Plan.”

 

ITEM 7—MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

The table below sets forth information relating to the ownership of our common shares as of September 30, 2020.

 

Shareholder  Number of Common Shares   Percentage (%)  

Number of Common Shares (including warrants)(6)

  

Percentage (%) (including warrants)(6)

 
Cresud(1)   19,910,800    32.06    30,910,539    39.82 
Cresud   19,909,800    32.06    30,644,868    39.48 
Agro Managers(2)   1,000    0.00    265,671    0.34 
Autonomy Capital (Jersey) LP(3)   8,269,800    13.32    8,269,800    10.65 
Charles River Capital(4)   5,574,150    8.98    5,574,150    7.18 
Elie Horn/Cape Town(5)   3,581,750    5.77    7,463,269    9.61 
Cape Town LLC   2,640,300    4.25    6,521,819    8.40 
Elie Horn   941,450    1.52    941,450    1.21 
Directors and Executive Officers (other than Mr. Eduardo Elsztain)   444,353    0.72    444,353    0.57 
Treasury   2,761,820    4.45    2,761,820    3.56 
Others   21,561,628    34.72    22,206,445    28.61 
Total   62,104,301    100.00    77,630,376    100.00 

 

(1)As of September 30, 2020, Mr. Eduardo S. Elsztain held (through companies controlled by him and proxies) a majority voting power in IFIS Limited, which owns 100% of the capital stock of IFISA, which, in turn, holds 22.91% of the capital stock of Cresud. Finally, Mr. Elsztain directly holds 0.09% of the capital stock of Cresud. Because of his ownership interest in IFIS Limited and IFISA, Mr. Eduardo Elsztain may appoint the majority of members of our board of directors and the board of directors of Cresud, as well as determine the substantive outcome of all decisions requiring shareholder approval with respect to Cresud. Accordingly, Mr. Elsztain may be deemed to beneficially own the shares held by Cresud and hold the sole voting and dispositive power with respect to such shares.
(2)Cresud may be deemed to hold the sole voting and dispositive power with respect to the shares held of record by Agro Managers.
(3)Autonomy Master Fund Limited is controlled by Autonomy Capital (Jersey) LP, and both entities are part of the group that employs Mr. Bruno Magalhães, a member of our board of directors. Certain of the shares held by Autonomy Master Fund Limited are held as hedge for total return swap transactions entered into between Credit Suisse Securities (Europe) Limited and Autonomy Master Fund Limited. The swap transactions mature on September 27, 2021.
(4)Consolidated position of the funds managed by Charles River Capital.
(5)Includes shares jointly held by Elie Horn and Cape Town LLC. Elie Horn is the principal shareholder of Cape Town LLC.
(6)Gives effect to the potential issuance of 15,526,075 common shares in connection with the 256,000 first issuance warrants that may be exercised until April 27, 2021. All warrants are held by Cresud, Agro Investment, Agro Managers and Cape Town LLC. See “Item 10—Additional Information—Description of Outstanding Warrants.”

 

For information about stock options held by our directors and executive officers, see “Item 6—E. Directors, Senior Management and Employees—Share Ownership.”

 

Our controlling and major shareholders do not have different voting rights.

 

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Controlling Shareholder

 

Cresud

 

Cresud was organized in December 1936 under the laws of Argentina. Cresud’s principal operating activities consist of the acquisition, development and sale of agricultural properties in Argentina, and the production of agricultural products. Its shares are listed on the Bolsas y Mercados Argentinos S.A. (ByMA) under the trading symbol “CRES” and on the NASDAQ under the trading symbol “CRESY.”

 

As of September 30, 2019, Mr. Eduardo S. Elsztain held (through companies controlled by him and proxies) a majority voting power in IFIS Limited, which owns 100% of the capital stock of IFISA, which holds 22.91% of the capital stock of Cresud. Finally, Mr. Elsztain directly holds 0.09% of the capital stock of Cresud. Because of his ownership interest in IFIS Limited and IFISA, Mr. Eduardo Elsztain may appoint the majority of our board of directors and the board of directors of Cresud, as well as determine the substantive outcome of all decisions requiring shareholder approval with respect to Cresud.

 

As a result of Cresud’s ownership interest in us, conflicts of interest could arise with respect to transactions involving our ongoing business activities, and the resolution of these conflicts may not be favorable to us. Specifically, business opportunities, including but not limited to potential targets for rural property acquisitions may be attractive to both Cresud and us. In addition, five of our nine directors have been nominated by Cresud. This situation may give rise to conflicts of interest. We may not be able to resolve any potential conflicts and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.

  

A. Other Major Shareholders

 

Monteiro Aranha S.A. and Charles River Capital

 

Monteiro Aranha S.A. is a Brazilian holding company founded in the early 1900s. Since its founding, the company has acquired stakes in Klabin S.A., Brazil’s Volkswagen Foundation in 1950, Ultrapar Participações S.A. and made other investments in the industrial and service sectors. Through its subsidiary Charles River Capital, an independent asset manager, the group is focused on equity funds.

 

Autonomy Capital (Jersey) L.P.

 

Autonomy Capital (Jersey) L.P. is an asset management company founded in 2003 by Robert Gibbins with six offices across the world.

 

Elie Horn and Cape Town LLC

 

Elie Horn is the sole shareholder of E.H. Capital Management Ltd., which is the principal shareholder of Cape Town LLC, a company organized under the laws of the State of Delaware. Elie Horn is the president and controlling shareholder of Cyrela Brazil Realty S.A., and has more than 40 years of experience in construction and management of commercial buildings in São Paulo and Rio de Janeiro, Brazil, as well as in selling and leasing luxury and high-technology business offices, and finally, to a lesser extent, in the leasing and management of shopping malls. In recent years, Mr. Horn has also been involved in the development of residential condominiums. Mr. Horn previously served as a member of our board of directors, elected at the general shareholders’ meeting held on October 27, 2011, and retired from the board on July 3, 2012.

 

Agro Managers

 

Agro Managers are companies organized under the laws of Argentina, controlled by Cresud´s controlling shareholder (Mr. Eduardo Elsztain) and Cresud, respectively. Agro Investment and Agro Managers hold 0.28% of our shares and Agro Managers holds 1.70% of our warrants.

 

Major Changes in Share Ownership

 

Purchase and Sale of our Common Shares by Monteiro Aranha S.A. and Other Aunds under the Management of Charles River Capital

 

On August 16, 2019, Monteiro Aranha S.A.and other funds under the management of Charles River Capital bought 3,104,400 of our common shares through the B3. Prior to the acquisition, Monteiro Aranha S.A.and other funds under the management of Charles River Capital held 1,217,500, or 2.1%, of our outstanding common shares. Immediately after the acquisition, they held 4,321,900, or 7.6%, of our outstanding common shares.

  

Purchase and Sale of our Common Shares by Conifer Management, LLC (formerly known as Ruane, Cunniff & Goldfarb Inc.)

 

On August 16, 2019, Conifer Management, LLC sold 2,900,000 of our common shares through the B3. Immediately after the sale, it held zero, or 0.0%, of our outstanding common shares.

 

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Purchase and Sale of our Common Shares by Banco Fator

 

On December 16, 2015, CSHG Commodities Fundo de Investimento Multimercado - Crédito Privado sold 1,611,000 of our common shares through the B3. Prior to the sale, it held 3,652,900, or 3.4% of our outstanding common shares. Immediately after the sale, it held 2,041,900, or 3.5%, of our outstanding common shares.

 

Purchase and Sale of our Common Shares by Autonomy Capital (Jersey) LP

 

On November 13, 2015, Autonomy Capital (Jersey) LP (“Autonomy Capital”) bought 1,668,800 of our common shares through the B3. Prior to the acquisition, Autonomy held 2,231,500, or 3.8%, of our outstanding common shares. Immediately after the acquisition, it held 3,900,300, or 6.7%, of our outstanding common shares.

 

On February 10, 2016, Autonomy Capital bought 4,330,000 of our common shares through the B3. Prior to the acquisition, Autonomy held 4,455,300, or 7.7%, of our outstanding common shares. Immediately after the acquisition, it held 8,785,300, or 15.1%, of our outstanding common shares.

 

On April 27, 2016, Autonomy Capital sold 79,400 of our common shares through the B3. Prior to the sale, Autonomy held 8,785,300 or 15.1%, of our outstanding common shares. Immediately after the sale, it held 8,705,900, or 15.0%, of our outstanding common shares.

 

On September 19, 2017, Autonomy Capital sold 600,000 of our common shares through the B3. Prior to the sale, Autonomy held 5,765,200 or 10.13%, of our outstanding common shares. Immediately after the sale, it held 5,165,200 or 9.08%, of our outstanding common shares.

 

On September 22, 2017, Autonomy Capital bought 2,566,800 of our common shares through the B3. Prior to the sale, Autonomy held 5,165,200 or 9.08%, of our outstanding common shares. Immediately after the sale, it held 7,732,000 or 13.59%, of our outstanding common shares.

 

On October 6, 2017, Autonomy Capital sold 2,263,790 of our common shares through the B3. Prior to the sale, Autonomy held 7,732,000 or 13.59%, of our outstanding common shares. Immediately after the sale, it held 5,468,210 or 9.61%, of our outstanding common shares.

 

Purchase and Sale of our Common Shares by JP Morgan Whitefriars Inc.

 

On November 13, 2015, JP Morgan Whitefriars bought 1,668,800 of our common shares through the B3. Prior to the acquisition, JP Morgan Whitefriars held 2,231,500, or 3.8%, of our outstanding common shares. Immediately after the acquisition, it held 3,900,300, or 6.7%, of our outstanding common shares.

 

On February 18, 2016, JP Morgan Whitefriars sold 3,900,300 of our common shares through the B3. Prior to the sale, JP Morgan Whitefriars held 3,900,300 or 3.8%, of our outstanding common shares. Immediately after the sale, it held zero, or 0.0%, of our outstanding common shares.

 

ADRs

 

On September 30, 2020, we had 22,032,848 shares representing ADRs, which were held in the United States by one holder of record.

 

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B. Related Party Transactions

 

We adhere to the corporate governance practices recommended and required under applicable law, including under the rules and regulations of the Novo Mercado and the B3 and Brazilian corporate law.

 

Decisions made regarding our operations are supervised by our board of directors and fiscal council in accordance with our bylaws and applicable law. Our bylaws provide that provision of services and consulting contracts entered into among us or our affiliates, on the one hand, and shareholders that, individually or in the aggregate, own at least 10% of our capital stock shall be submitted by our board of directors for shareholder approval at our general meeting.

 

Contracts entered into with related parties are negotiated individually and are analyzed in comparison with the market conditions of the applicable region. Along these lines, all transactions entered into with related parties should be documented, including their principal terms such as price, term limit, interest rates, and the respective rights and obligations of the parties, and such terms should be consistent with those prevailing in the market.

 

We, our shareholders, our directors and officers, and the members of our fiscal council, when active, should submit to arbitration for any dispute relating to the application, legality, effectiveness, interpretation, violation and effects of violation of the provisions in the agreement for participation in the Novo Mercado listing segment, and to the Novo Mercado listing rules, the arbitration regulation instituted by the B3, the provisions of Brazilian corporate law, our bylaws, the rules of the National Monetary Council, or Conselho Monetário Nacional (“CMN”) and the Central Bank, the regulations of the Securities Commission, or Comissão de Valores Mobiliários (“CVM”), and the B3 and other rules generally applicable to the Brazilian capital markets. Any such dispute should be settled by arbitration carried out before B3 Arbitration Chamber.

 

According to Chapter 12 of this rule, the parties may consent to agree to use another arbitration chamber or forum to resolve their disputes.

 

Investment in Agrofy

 

In October 2019, we made an investment of US$ 1.0 million in Agrofy, which represented a 1.8% stake in the share capital of Agrofy. Agrofy is an online marketplace that offers a complete range of e-commerce solutions customized to meet the needs of retailers and their partners, seeking an alternative way of connecting farmers and suppliers. As of June 30, 2020, Cresud, our controlling shareholder, held a 22.3% stake in the share capital of Agrofy.

 

Cresca Acquisition and re-distribution of assets and liabilities

 

Purchase of interest in joint venture, debts and advisory contract with Cresca S.A.

  

On December 12, 2013, BrasilAgro executed contracts with Cresud for: (i) the acquisition of 50% interest in Cresca S.A., (ii) the assumption of Cresud credits from Cresca, and (iii) the execution of an advisory contract pursuant to which Cresud has agreed to render services in the forest agricultural exploration to Cresca in exchange for payments of fees.

 

Cresca is a company that invests in agricultural and cattle raising land in Paraguay. At the purchase date, it owned approximately 81,000 hectares and a contract for the right to purchase approximately 61,000 additional hectares of agricultural land in the region of Mariscal Estigarribia in Paraguay.

 

Pursuant to the agreement, Cresca purchased 35,864 hectares on July 9, 2014 and the remaining 24,753 on January 20, 2015.

 

On April 7, 2014, Cresca sold 24,624 undeveloped hectares.

 

On October 5, 2016, we entered into an agreement with Carlos Casado, our partner in Cresca at the time, pursuant to which we agreed to try to sell all the land that Cresca owned for a 120-day period as of the execution date of the aforementioned agreement. Further to the provisions of the agreement, we and Carlos Casado also agreed to split ownership of the land among us and Carlos Casado if either party failed to dispose of the totality of the land within the 120-day period.

 

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As the properties were not sold to third-parties, on June 6 and June 8, 2017, we and Carlos Casado decided to proceed with the re-distribution of assets and liabilities of Cresca, whereby we would separate and divide the assets and liabilities of Cresca, and Cresca would distribute them to us and to Carlos Casado.

 

As a result of this transaction, we now have the following two subsidiaries that received Cresca’s assets and liabilities: (i) Palmeiras, which was incorporated to operate the activities of our investment in Cresca and (ii) Moroti, a subsidiary that received, on February 9, 2018, upon conclusion of the process, all other assets and liabilities of Cresca attributed to BrasilAgro, including land and debts.

 

On February 9, 2018, the re-distribution of assets and liabilities of Cresca was concluded and the portion of assets and liabilities attributed to the Company was transferred to the wholly-owned subsidiary Moroti.

 

As part of the redistribution of assets and liabilities, the Company and Carlos Casado, partners in the joint venture, decided to waive the interest for late payment on the intercompany loans taken by Cresca in the total amount of R$32,9 million, of which BrasilAgro’s share was R$16,6 million.

 

As of June 30, 2020, Moroti owned 59,585 hectares of which 34,673 were arable. For more information, see Note 1.6 to the financial statements included in this annual report.

 

C. Interests of experts and counsel

 

Not applicable.

 

ITEM 8—FINANCIAL INFORMATION

 

A. Consolidated Statements and Other Financial Information

 

See “Item 18—Financial Statements” below.

 

Legal Proceedings

 

We and our subsidiaries are subject to legal and administrative proceedings involving environmental, labor, civil, tax and criminal matters. As of June 30, 2020, we were defendants in 98 pending legal and administrative proceedings, of which 13 are environmental proceedings, 46 are labor proceedings, 31 are tax proceedings, 7 are civil proceedings, and one is a criminal proceeding. Also, as of June 30, 2020, we were plaintiffs in 21 pending legal and administrative proceedings, of which one is an environmental proceeding, 6 are tax proceedings and 14 are civil proceedings.

 

As of June 30, 2020, we had total provisions of R$1.467 million for probable losses, including R$1 million for labor proceedings, R$67 thousand for civil proceedings and R$400 thousand for environmental proceedings. We believe that our provisions for contingencies suffices for purposes of covering probable losses that may result from the proceedings to which our Company and our subsidiaries are parties, based on the opinion of our external legal advisors.

 

The labor proceedings include claims filed by former employees and third-party contractors. In most cases, the Company and its subsidiaries are jointly liable for claims by third party contractors, since the discussion involves possible rights between outsourcing companies and their former employees. See “Item 3— Key Information—Risk Factors—Risks Relating to our Business and Industry—We are dependent on third-party service providers and subject to recent changes in the Brazilian labor legal framework.”

 

We do not expect probable losses to result from our tax and criminal proceedings currently in progress.

 

Among our legal and administrative proceedings as of June 30, 2020, we have identified the following material contingencies in view of the adverse effects that they could have on our activities and the amount involved in the claims (we considered material for this purpose all legal and administrative proceedings filed against the Company involving amounts exceeding R$500 thousand):

 

Civil Proceedings

 

We are defendants in a civil claim filed on June 10, 2009 by certain parties in the Judicial District Court of Correntina, State of Bahia, for the annulment of the deed of sale and purchase of agricultural property executed by and among our Company and others. We have filed our defense and await the decision. The total amount involved in the claim is R$4.8 million and our chance of loss is estimated as possible. If we are unsuccessful, we could be required to relinquish the equivalent of 2,561,681 hectares of land corresponding to 6.9% of the total area of Chaparral farm. We have not made any provision in connection with this proceeding.

 

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We are co-defendants in an action for damages brought on March 14, 2013 by the widow of an individual who died in a car accident on August 29, 2011 involving a truck used by one of our service providers for the cutting, loading and transportation of sugar-cane produced in our Araucaria farm. We filed our defense on March 19, 2013. We are waiting for the decision that will start the evidence phase in the proceedings. The total amount involved in the suit, as claimed by the plaintiff, is R$1.4 million and our chances of loss have been classified as possible. We have not made any provision in connection with this proceeding.

 

We are defendants in an injunction lawsuit filed by Mundo dos Cereais on May 10, 2010 seeking to void an out-of-court promissory note that BrasilAgro presented to a notary public for collection against Mundo dos Cereais issued to guarantee Mundo dos Cereais’ acknowledgement of debt in a principal amount of R$847 thousand and relating to an agreement for the purchase of rice. On October 25, 2016, the trial judge issued an order dismissing the lawsuit. Despite the fact that the lawsuit has been dismissed, we filed a motion for clarification to reinstate the effects of our presentation of the promissory note for collection. We are currently waiting for a decision on our motion for clarification.

 

Tax Proceedings

 

As of June 30, 2020, we had judicial and administrative tax claims in the amount of R$5.4 million mainly related to proceedings whose merit is related to: (i) notice of infraction issued for the collection of ICMS tax credits based on the understanding that the Company would have remitted primary products to exporter companies with the specific purpose of exporting, alleging that such products would not have been remitted abroad in the period of 180 days from the shipment of goods; and (ii) the reversal of a court order that partially approved negative income tax credits for the fourth quarter of 2007 and, as a consequence, did not approve offsets made by the Company relating to such credits. We have not made any provision in connection with these tax proceedings.

 

Also, we are plaintiffs in judicial and administrative claims in the aggregate amount of R$2.0 million mainly related to proceedings whose merit is related to: (i) suspension of INCRA, SEBRAE and FNDE contributions; and (ii) the annulment of tax credits related to monthly estimates of IRPJ and CSLL for January 2012.

 

Environmental Proceedings

 

We were defendants in an environmental administrative claim filed on September 13, 2013 by the Environmental Protection Board for the Brazilian Institute for the Environment and Natural Renewable Resources (Ibama) involving the total amount of R$5.9 million under the argument that we have deforested a permanent preservation area. The Ibama notified us on October 8, 2012 that it had rejected our defense. In October 2012, we filed an appeal to this decision, which was also rejected. On September 13, 2013, we filed a lawsuit before the federal courts of Goiás, for annulment of the infraction notice and cancellation of the fine. On October 15, 2013, we placed a court deposit on the amount equivalent to the fine imposed, in order to obtain the granting of injunction relief to suspend the payment of the fine until the end of the lawsuit. Due to the court deposit, the payment of the fine is suspended until final judgment in the case. In June 2015, a favorable decision was enacted in the first instance, decreasing the annulment of the infraction notice and cancellation of the fine. Ibama has submitted an appeal in order to revert such decision. On March 30, 2016, we filed a petition requesting the replacement of the deposit for a letter of guarantee corresponding to the amount of R$7.94 million (updated value of the deposit plus 30%, according to the article 848 of the Brazilian Civil Procedure Code). On August 29, 2016, the court granted the replacement of the guarantee. On September 9, 2016, Ibama filed an appeal against such decision and, on December 16, 2016, BrasilAgro filed its answer to Ibama’s appeal. On June 1, 2017, BrasilAgro filed a motion requesting the enforcement of replacement of guarantee. On June 5, 2017, the court allowed BrasilAgro to withdraw the judicial deposit in the amount of R$5.75 million. On June 11, 2018, BrasilAgro filed a motion requesting the replacement of the letter of guarantee by an insurance letter. We are currently awaiting a ruling on Ibama’s appeals. Considering there has been a favorable decision at the lower court level in this particular lawsuit, our chances of loss have been classified as remote.

 

Labor Proceedings

 

We are co-defendants in a labor judicial claim filed on June 17, 2016 by two individuals involving a revised amount of R$824 thousand. The lawsuit seeks to acknowlegde illegal outsourcing and the payment of material and moral damages. The lawsuit has been suspended by a judicial order while the determination of the standing of the plaintiffs is pending. We have not made any provision in connection with this proceeding.

 

We are also defendants in two related claims filed on March 10, 2020 and March 31, 2020 by two other individuals involving a revised amount of R$2.5 million. These lawsuits seek the payment of material and moral damages for a fatal accident involving their son. On July 15, 2020, the Company entered into a settlement agreement with the plaintiffs to dismiss the lawsuits.

 

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Administrative Proceedings involving our Controlling Shareholder and Directors

 

In June 2015, an application to approve an action as a class action was filed with the Central District Court in Lod, Israel, against IDBD, Dolphin Netherlands BV (IDBD’s controlling shareholder), C.A.A. Extra Holdings Ltd. (IDBD’s former controlling shareholder, or “CAA”), and current and former directors, including alternate directors (including, among others, Messrs. Eduardo Elsztain, Sholem Lapidot, Saul Zang and Mauricio Wior) (the “Defendants”). The complaint alleges that they hold shares in IDBD and that they are creditors of a debt arrangement with IDB Holdings Corporation Ltd. (the “Plaintiffs” and “Debt Arrangement,” respectively) raising, among others, claims regarding the conduct of IDBD’s controlling shareholders and of its board of directors in connection with the expiration of a transaction for the sale of IDBD’s holdings in Clal Insurance Enterprises Holdings Ltd. (“Clal Insurance”) in May 2014 and in connection with a rights issuance by IDBD in July 2014 and February 2015.

 

In March 2016, the Plaintiffs filed a motion to dismiss the class action application and, in June 2016, the Court partially accepted the motion and ordered the Plaintiffs to file an amended class action application that would include only the allegations and remedies with respect to the Clal Insurance transaction. In August 2016, the Defendants filed a motion to appeal (regarding the part of decision that did not dismiss the allegations concerning the Clal Insurance transaction) and the Plaintiffs filed an appeal (regarding the part of the decision that dismissed the allegations concerning the rights issuance) both with the Israeli Supreme Court.

 

Following the dismissal of the appeal proceedings by the Supreme Court, the Plaintiffs filed, in January 2018, a motion of appeal to summarily dismiss the appeal filed by the Defendants, in which the Court ordered the striking of the motion for causes of action that fall under an exemption condition included in the amendment to the Debt Arrangement pertaining to damage that was allegedly caused due to prejudice of rights by virtue of the undertaking of the controlling shareholder and the former controlling shareholder to perform a tender offer for IDBD’s shares in accordance with the Debt Arrangement. The Plaintiffs filed an amended motion to approve the claim as a class action.

 

Dolphin, IDBD and IDBD’s directors filed a detailed joint answer on May 7, 2018. The preliminary hearing was scheduled for November 28, 2019.

 

In July 2019, the Plaintiffs filed a motion (in partial agreement) for withdrawal from the proceeding against the Defendants. In light of CAA and IDBD’s former controlling shareholder refusal to agree to the Plaintiffs’ withdrawal without an order for expenses, the Court has set a time for filing arguments on the expenses.

 

Distributions to Shareholders

 

Amounts Available for Distribution

 

At each annual shareholders’ meeting, our board of directors is required to submit to shareholder approval its proposal on the allocation of our net income for the preceding year. Pursuant to Brazilian corporate law, the proposal of the board of directors has to be evaluated by the fiscal council (conselho fiscal), if in operation. Brazilian corporate law defines “net income” for any fiscal year as the results in a given year after the deduction of accrued losses from prior years, the provisions for income and social contribution taxes for that year, and any amounts allocated to profit-sharing payments to the employees and management (provided, however, that such payments will only be disbursed after payment of the mandatory dividend to the company’s shareholders). All calculations in connection with net income and its allocation to reserves are based on the audited financial statements for the preceding fiscal year.

 

Our bylaws provide that an amount equal to at least 25% of our adjusted net income for any given year should be available for distribution as a mandatory dividend or interest on shareholders’ equity. Adjusted net income is calculated by adjusting net income as follows: (i) deducting amounts allocated to legal reserve, statutory reserve, contingency reserve, retained earnings and unrealized profit reserve, as applicable; (ii) adding amounts reversed from the contingency reserve; and (iii) adding unrealized profit reserve amounts, upon their realization and if not offset by subsequent losses, if any. Such amount represents the minimum mandatory dividend, or mandatory dividend. The allocation of amounts to the mentioned reserves cannot be made to the detriment of the payment of the mandatory dividend. Moreover, the minimum mandatory dividend may be limited to the ‘realized’ portion of net income. Our calculation of net income and allocations to reserves for any year, as well as the amounts available for distribution, are determined on the basis of our financial statements prepared in accordance with Brazilian corporate law. For more information, see “Item 8—Financial Information— Payment of Dividends and Interest on Shareholders’ Equity” below.

 

The distribution of dividends for the year ended June 30, 2020 was approved at our shareholders’ meeting held on October 16, 2020 in the amount of R$42.0 million, or R$0.7078 (or US$0.1259) per share. The dividends shall be paid to shareholders in up to 30 days from the date of their declaration, for holders of record of our shares as of October 16, 2020.

 

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Reserve Accounts

 

Brazilian corporate law provide for two main categories of reserve accounts, which may be used for purposes of dividend payments: income reserve accounts and capital reserve account.

 

Income Reserve Accounts

 

Pursuant to Brazilian corporate law, our income reserve accounts are comprised of the legal reserve, the contingency reserve, the fiscal subsidies reserve, the investment and expansions reserve and the retained earnings reserve.

 

The balance of the income reserves, except for the balances of contingency, fiscal subsidies and unrealized profit reserves, may not exceed the amount of our capital stock. In case of excess, our shareholders shall decide at a shareholders’ meeting whether the excess amount will be used to pay or increase our capital stock or pay dividends.

 

Legal reserve: Under Brazilian corporate law, we are required to maintain a legal reserve to which we must allocate 5% of our net income for each fiscal year until the aggregate amount of the reserve equals 20% of our capital stock. However, we are not required to make any allocations to our legal reserve in a year in which the legal reserve, when added to our other capital reserves, exceeds 30% of our capital stock. The amounts allocated to such reserve must be approved by our shareholders in a shareholders’ meeting, and may only be used to increase our capital stock or to offset net losses. As of June 30, 2020, we had R$31.5 million allocated to legal reserve.

 

Contingency reserve: Pursuant to Brazilian corporate law, a percentage of our net income may be allocated to a contingency reserve for anticipated losses that are deemed probable in future years, if their amount may be estimated. This allocation has to be proposed by the company’s management and approved at a shareholders’ meeting. The management’s proposal must indicate the cause of the anticipated loss and justify the need for such allocation. Any amount so allocated must be reversed in the fiscal year in which a loss that had been anticipated fails to occur as projected or charged off in the event that the anticipated loss occurs. As of June 30, 2020, we had no contingency reserve.

 

Fiscal subsidies reserve: The part of net income corresponding to amounts granted by the government to our company for investment purposes may be allocated to the fiscal subsidies reserve. Pursuant to Brazilian corporate law, this allocation is only permitted if proposed by our management and approved at a shareholders’ meeting. Such amounts will not be taken into account for purposes of the calculation of the mandatory dividend. As of June 30, 2020, we had no fiscal subsidies reserve.

 

Investment and expansion reserve: Pursuant to Brazilian corporate law, the amount by which the mandatory dividend exceeds the realized net income in any given year may be allocated to other earnings reserve or investment and expansion reserve, and the mandatory dividends may be limited to the realized portion of the net income. Brazilian corporate law defines realized net income as the amount by which our net income exceeds the sum of our net positive results, if any, from the equity method of accounting; and the income, gains or profits resulting from transactions that occurred in the relevant fiscal year but that will be received by us after the end of the next year. Profits recorded as earnings reserve must be added to the next mandatory dividend distributed after the realization of such profits, if not absorbed by losses in subsequent years. As of June 30, 2020, we had R$327.1 million allocated to investment and expansion reserve.

 

Retained earnings reserve: Pursuant to Brazilian corporate law, we are permitted to allocate part of our net income to discretionary reserve accounts that may be established in accordance with our bylaws, which must also indicate the purpose, allotment criteria and maximum amount of the reserve. The allocation of net income to retained earnings reserve accounts may not be made if it affects the payment of the minimum mandatory dividend. As of June 30, 2020, we had no funds allocated to retained earnings reserves.

 

Capital Reserve Account

 

Pursuant to Brazilian corporate law, we may maintain capital reserves in which we may record goodwill paid in connection with the subscription of our shares, mergers, sale of warrants, subscription bonds, participation certificates (which are not applicable to us), debentures, donations, stock option granted and governmental granting for investments. These reserves may only be used for the following purposes: (i) to offset losses that exceed the retained earnings and income reserves, (ii) to redeem, repay or purchase shares of our capital stock, and (iii) to increase our capital stock. The amounts allocated to our capital reserve account are not considered for purposes of the calculation of mandatory dividends. As of June 30, 2020, we had R$(34.3) million allocated to reserve of goodwill on share issue, linked to the acquisition of Agrifirma on January 27, 2020 (See Note 1.1 to the financial statements included in this annual report), a transaction that was completed through a transfer of shares that generated a difference between capital increase and equity increase.

 

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Payment of Dividends and Interest on Shareholders’ Equity

 

Brazilian corporate law requires that the bylaws of a Brazilian corporation specify a minimum percentage of the income available for the annual distribution of dividends, known as mandatory dividend, which must be paid to shareholders as either dividends or interest on shareholders’ equity. The basis of the mandatory dividend is a percentage of the net income, as adjusted pursuant to Brazilian corporate law. Under our bylaws, a minimum of 25% of our adjusted net income should be intended for the distribution and payment to our shareholders as mandatory dividend. However, the payment of mandatory dividends to our shareholders may be limited to the amount of realized net income in a given year, provided the difference should be recorded as unrealized income reserve. Our calculation of net income and allocations to reserves for any year, as well as the amounts available for distribution, are determined on the basis of our non-consolidated financial statements prepared in accordance with Brazilian corporate law. The mandatory dividend may also be paid as interest on shareholders’ equity, in which event it is deemed a deductible expense for purposes of income and social contribution taxes on revenue.

 

In addition, our board of directors may advise our shareholders that additional dividends may be distributed from other income or reserves legally available for distribution. Brazilian corporate law allows, however, a company to suspend such dividend distribution if its board of directors reports at our annual shareholders’ meeting that the distribution would be inadvisable given the company’s financial condition. The fiscal council, if in place at the time, should review any suspension of the mandatory dividend. In addition, our management should submit a report to the CVM setting forth the reasons for the suspension. Net income not distributed by virtue of a suspension is allocated to a separate reserve and, if not absorbed by subsequent losses, is required to be distributed as dividends as soon as the financial condition of the company should permit such payment.

 

Our board of directors may distribute interim dividends on the basis of monthly, bi-monthly, quarterly or semi-annual financial statements. Our dividend policy has to comply at all times with the mandatory dividend requirements under Brazilian corporate law.

 

Shareholders have a three-year period from the date of the payment to claim the dividends or interest on shareholders’ equity with respect to their common shares, as applicable, after which the aggregate amount of any unclaimed amounts legally reverts to us.

 

Dividends

 

The distribution of dividends in any given fiscal year is proposed by our executive officers (Diretoria) to the board of directors, which then submits a detailed proposal to shareholders at a shareholders’ meeting. In preparing this proposal, the board of directors will take into account our business strategy, investment plans, financial condition and the recommendations of the fiscal council. The proposal for distribution of dividends is then submitted to our annual shareholders’ meeting, in which a majority of the voting shareholders is necessary to approve it. We may distribute additional dividends if so deemed adequate by our board of directors in view of our capital structure. Our board of directors may revise or modify our dividend policy at any time.

 

We are required by Brazilian corporate law and our bylaws to hold an annual shareholders’ meeting no later than four months after the end of each fiscal year, at which time the allocation of the results of operations in any year and the distribution of an annual dividend are reviewed. The distribution of annual dividends is based on our audited financial statements prepared for the immediately preceding fiscal year.

 

Any holder of record of common shares at the time a dividend is declared is entitled to receive dividends. Under Brazilian corporate law, dividends are generally required to be paid within 60 days following the date on which the dividend is declared, unless the shareholders’ resolution established another payment date, which, in any event, must occur before the end of the year in which the dividend is declared. Our bylaws do not require that dividend payments be adjusted for inflation.

 

Interest on Shareholders’ Equity

 

Since January 1, 1996, Brazilian companies have been authorized to pay interest on shareholders’ equity to shareholders, and to treat those payments as deductible expenses for purposes of calculating corporate income tax and, since 1997, the social contribution tax, as well. The amount of the tax deduction in each year is limited to the greater of (i) 50.0% of our net income (after the deduction of social contribution tax on net profit, but before taking into account the provision for corporate income tax and the amounts attributable to shareholders as interest on shareholders’ equity) for the period in respect of which the payment is made; and (ii) 50.0% of our accumulated profits and income reserves at the beginning of the relevant period. The rate applied in calculating interest on shareholders’ equity cannot exceed the pro rata daily variation of the TJLP.

 

Payments of interest on shareholders’ equity to our shareholders, whether or not residing in Brazil, are subject to Brazilian withholding tax at the rate of 15%. A tax rate of 25% applies if the shareholder receiving such interest on shareholders’ equity resides at a Tax Haven Jurisdiction, which is defined under Brazilian tax laws as a country where income tax is not levied, or levied at a maximum rate lower than 17%, or where the local legislation does not allow access to information related to shareholding composition of legal entities or to their ownership or to the identity of the effective beneficiary of the income attributed to non-residents. See “Item 10—Additional Information—Taxation—Brazilian Tax Considerations—Interest on Shareholders’ Equity.”

 

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Amounts paid as interest on shareholders’ equity, net of withheld income tax, can be taken into consideration for purposes of distribution of the mandatory dividend. If a distribution of interest on shareholders’ equity in any given fiscal year is not recorded as part of the mandatory dividend distribution, we will not withhold the applicable income tax, which will have to be paid by our shareholders.

 

Pursuant to Law No. 9,249, of December 26, 1995, as amended, interest on shareholders’ equity paid or payable to our shareholders should be computed in our results for the year under financial expenses. For purposes of the presentation of financial statements, however, these amounts revert to the statement of income charged to accumulated earnings as profit distribution.

 

We have never paid interest on shareholders’ equity since the beginning of our operations.

 

Recent Dividend Payments

 

The distribution of dividends for the year ended June 30, 2020 was approved at our shareholders’ meeting held on October 16, 2020 in the amount of R$42.0 million, or R$0.7078 (or US$0.1259) per share. The payment of dividends will be made to shareholders in up to 60 days from the date of their declaration, for holders of record of our shares as of October 16, 2020.

 

The distribution of dividends for the year ended June 30, 2019 was approved at our shareholders’ meeting held on October 16, 2019 in the amount of R$50.0 million, or R$0.93 (or US$0.22) per share. The payment of dividends was made on November 14, 2019, for holders of record of our shares as of October 16, 2019.

 

The distribution of dividends for the year ended June 30, 2018 was approved at our shareholders’ meeting held on October 16, 2018 in the amount of R$41.0 million, or R$0.76 (or US$0.21) per share. The payment of dividends to shareholders was made on November 6, 2018, for holders of record of our shares as of October 16, 2018.

 

The distribution of dividends for the year ended June 30, 2017 was approved at our shareholders’ meeting held on October 2, 2017 in the amount of R$13.0 million, or R$0.27 (or US$0.07) per share. The payment of dividends to shareholders was made on October 30, 2017, for holders of record of our shares as of October 2, 2017.

 

The distribution of dividends for the year ended June 30, 2016 was approved at our shareholders’ meeting held on October 21, 2016 in the amount of R$10.0 million, or R$0.18 (or US$0.06) per share and at our extraordinary shareholders’ meeting held on November 07, 2016 in the amount of R$22.0 million, or R$0.40 (or US$0.12) per share, totaling the amount of R$32.0 million or R$0.58 (or US$ 0.18) per share.

 

B. Significant Changes

 

The Company is not aware of any changes bearing upon its financial condition since the date of the financial statements included in this Annual

Report.

 

ITEM 9—THE OFFER AND LISTING

 

A. Offer and listing details

 

Our common shares began trading on the Novo Mercado market segment of the B3 on May 15, 2006 under the symbol AGRO3. The ISIN for our common shares is BRAGROACNOR7.

 

In September 2010, we established a Level 1 American Depositary Receipt (ADR) program in the United States, which, as of September 20, 2010, has allowed our ADRs to be traded on the over-the-counter (OTC) market in the United States under the symbol “BRCPY.”

 

In November 2012, we established a Level 2 American Depositary Receipt (ADR) program in the United States, which, as of November 8, 2012, has allowed our ADRs to be traded on the New York Stock Exchange (NYSE) under the symbol “LND.”

 

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As of June 30, 2020, we had 11,786,207 ADRs outstanding, with no par value. There are no restrictions on ownership of our ADRs by individuals or legal entities domiciled outside Brazil.

  

Investments in our Common Shares by Non-residents of Brazil

 

Investors residing outside Brazil are authorized to purchase equity instruments, including our common shares, on the B3, provided that they comply with the registration requirements set forth in Resolution No. 4,373 and CVM Instruction No. 325.

 

Except for certain limited exceptions, Resolution No. 4,373 sets forth that investors are permitted to carry out any type of transaction in the Brazilian financial capital market involving a security traded on a Brazilian stock, futures or organized OTC market. Investments and remittances outside Brazil of gains, dividends, profits or other payments derived from our common shares are made by means of the foreign exchange market.

 

In order to become a Resolution No. 4,373 investor, an investor residing outside Brazil must:

 

  ● appoint a representative in Brazil with powers to take actions relating to the investment;

 

  ● obtain a taxpayer identification number from the Brazilian tax authorities;

 

  ● appoint an authorized custodian in Brazil for the investments, which must be a financial institution duly authorized by the Central Bank and CVM; and

 

  ● by means of its representative, register himself as a foreign investor at CVM and the investment at the Central Bank.

 

Securities and other financial assets held by foreign investors pursuant to Resolution No. 4,373 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading by foreign investors are as a general rule restricted to transactions involving securities listed on the Brazilian stock exchanges or traded in organized OTC markets licensed by the CVM.

 

Foreign direct investors under Law No. 4,131, of September 3, 1962, as amended, or Law No. 4,131, may sell their shares in both private and open market transactions, but these investors are currently subject to less favorable tax treatment on gains. Particularly in this regard, please refer to “Item 10—Additional Information—Taxation—Brazilian Tax Considerations—Taxation of Gains.”

 

A foreign direct investor under Law No. 4,131 must:

 

  ● register himself as a foreign direct investor at the Central Bank;

 

  ● obtain a taxpayer identification number from the Brazilian tax authorities; and

 

  ● appoint a tax representative in Brazil; and appoint a representative in Brazil for service of process in respect of suits based on the Brazilian corporate law.

 

B.Plan of Distribution

 

Not applicable.

 

C. Markets

 

Our common shares are traded on the Novo Mercado listing segment of B3 under the symbol “AGRO3.” Our ADRs are traded on New York Stock Exchange (NYSE) under the symbol “LND.”

 

Trading on the B3

 

B3 concentrates all trading activities of shares and commodities in Brazil. Trading on the exchange is conducted by authorized members. Trading sessions take place every business day, from 10:00 a.m. to 5:00 p.m. (local time) on an electronic trading system called Megabolsa. Trading is also conducted between 5:30 p.m. and 6:00 p.m. (local time) in an after-market system connected to both traditional broker dealers and brokerage firms operating on the Internet. This after-market trading is subject to regulatory limits on price volatility of securities traded by investors operating on the Internet.

 

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In order to maintain control over the fluctuation of the B3 index, the B3 has adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the B3 index falls below 10% or 15%, respectively, in relation to the closing index levels of the previous trading session. In addition, in case the B3 index falls below the 20% mark, the B3 may suspend trading sessions for a period of time to be established at its discretion at the time said lower mark is reached.

 

When investors trade shares on the B3, the trade is settled in three business days after the trade date, without adjustments to the purchase price. The seller is ordinarily required to deliver the shares to the exchange on the third business day following the trade date. Delivery of and payment for shares are made through the facilities of an independent clearing house, the Central Depository B3, which handles the multilateral central counterparty settlement of both financial obligations and transactions involving securities. According to the regulations of the B3, financial settlement is carried out through the system of transfer of funds of the Central Bank and the transactions involving the sale and purchase of shares are settled through the B3 custody system. All deliveries against final payment are irrevocable.

 

The Novo Mercado segment

 

The Novo Mercado is a stock market segment of the B3 intended for companies meeting certain requirements and agreeing to adhere to heightened corporate governance rules. The principal Novo Mercado rules and requirements are summarized as follows:

 

  ● capital stock should be exclusively composed of common shares, and the issuance or maintenance of so called founder’s shares is prohibited;

 

  ● public float of shares should represent at least 25% of the capital stock;

 

  ● in the event of a transfer of control, even if through a series of successive sales, the transfer should be subject to the minority shareholders being granted the same conditions offered to any controlling shareholders, including the same price, through a tender offer for the acquisition of shares (tag-along rights);

 

  ● the board of directors should be composed of at least five members, of which at least 20% should be independent directors elected during the shareholders’ meeting for a term of up to two years, with reelection permitted;

 

  ● new members of the board of directors and the executive officers are required to sign an agreement, the Management’s Consent Statement (Termo de Anuência dos Administradores), that makes their taking of office subject to the execution of this agreement, through which the new directors and executive officers of the company take personal responsibility to act in accordance with the listing agreement with the Novo Mercado, the rules of the Market Arbitration Chamber (Câmara de Arbitragem do Mercado) and the Novo Mercado regulation;

 

  ● a statement of cash flow (both the company’s and consolidated) must be included in the quarterly financial reports and annual financial statements;

 

  ● the schedule of corporate events should be disclosed annually to the shareholders, by the end of the month of January; and

 

  ● delisting from the Novo Mercado, as well as the decision to cancel the registration as a public company, should be subject to any controlling shareholders’ making a public tender offer for the acquisition of all outstanding shares of the company, at a minimum price of their economic value determined in a valuation report prepared by a specialized institution or company with recognized experience and independent from persons with the power to make decisions within a company, such as directors or any controlling shareholders, in addition to meeting the requirements set forth in Article 4 of the Brazilian corporate law; and the issuer, any controlling shareholders, members of management and members of the fiscal council should submit to the Market Arbitration Chamber under the terms of its regulation, any dispute or controversies that may arise among themselves, relating to and resulting from, specifically, the application, validity, effectiveness, interpretation, violation and effects of the arrangements contained in the Brazilian corporate law, our bylaws, the rules and regulations of the CMN, the Central Bank, and the CVM, as well as additional rules and regulations applicable to the capital markets, Novo Mercado regulation, the rules of the Market Arbitration Chamber and the listing agreement with the Novo Mercado.

 

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Regulation of Brazilian securities markets

 

The Brazilian securities market is governed by the CVM, as provided for by Law No. 6,385, of December 7, 1976, as amended, or the Brazilian Securities Exchange Law, and Brazilian corporate law. The CVM is responsible for granting licenses to brokerage firms to govern their incorporation and operation, and regulating foreign investment and exchange transactions, as provided for by the Brazilian Securities Exchange Law and Law No. 4,595, of December 31, 1964, as amended. These laws and regulations provide for, among other things, disclosure requirements, criminal sanctions for insider trading and price manipulation, protection of minority shareholders, the procedures for licensing and supervising brokerage firms and the governance of Brazilian stock exchanges.

 

Under Brazilian corporate law, a company is required to be publicly held, or companhia aberta, before listing its shares. All publicly held companies are registered with the CVM and are subject to reporting requirements in order to periodically disclose information and material facts. A company registered with the CVM may trade its securities either on the Brazilian exchange markets, including the B3, or in the Brazilian OTC market. Shares of companies listed on B3 may not simultaneously trade on the Brazilian OTC market. The OTC market consists of direct trades between persons in which a financial institution registered with the CVM serves as an intermediary.

 

No special application, other than registration with the CVM (or, in case of organized OTC markets, registration with the applicable one), is necessary for securities of a public company to be traded in this market. To be listed on the B3, a company must apply for registration at the B3 and the CVM.

 

The trading of securities on B3 may be suspended at the request of a company in anticipation of a material announcement. Trading may also be suspended upon the initiative of the B3 or the CVM based on or due to a belief that a company has provided inadequate information regarding a significant event or has provided inadequate responses to inquiries raised by the CVM or the B3, among other reasons.

 

D. Selling Shareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

F. Expenses of the Issue

 

Not applicable.

  

ITEM 10—ADDITIONAL INFORMATION

 

A. Share Capital

 

Not applicable.

 

B. Memorandum and Articles of Association

 

Organization, Register and Entry Number

 

We are a publicly-listed corporation, or sociedade por ações de capital aberto, organized in accordance with Brazilian law. Our registered office is located at Avenida Faria Lima, 1309, 5th floor, in the city of São Paulo, State of São Paulo, Brazil. We are registered with the Commercial Registry of the state of São Paulo (Junta Comercial do Estado de São Paulo) under NIRE No. 35.300.326.237, and with the CVM under No. 20036.

 

On April 10, 2006, we and our principal shareholders entered into the Novo Mercado Participation Agreement (Contrato de Participação no Novo Mercado) with B3. Also, as required under the Novo Mercado listing regulations, all our directors, officers and members of our fiscal council have undertaken to abide by the rules set forth in the Novo Mercado Participation Agreement and by the Novo Mercado listing segment rules and regulations applicable to each of them.

 

Our common shares are traded on the Novo Mercado listing segment of B3 under the symbol “AGRO3.” In September 2010, we established a Level 1 American Depositary Receipt (ADR) program in the United States, which, as of September 20, 2010, has allowed our ADRs to be traded on the over-the-counter (OTC) market in the United States under the symbol “BRCPY.” In November 2012, we established a Level 2 American Depositary Receipt (ADR) program in the United States, which, as of November 8, 2012, has allowed our ADRs to be traded on New York Stock Exchange (NYSE) under the symbol “LND.”

 

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Capital Stock

 

During the fiscal year ended June 30, 2016, we acquired 3,557,900 common shares under the share buyback program, which accounted for 10.55% of our outstanding shares (excluding the shares held by the controlling shareholder).

 

During the year ended June 30, 2017, we acquired a total of 1,345,400 common shares under our share buyback program, which accounted for 3.99% of our shares outstanding (excluding the shares held by the controlling shareholder).

 

During the year ended June 30, 2018, we acquired a total of 50,300 common shares under our share buyback program, which accounted for 0.15% of our shares outstanding (excluding the shares held by the controlling shareholder).

 

During the years ended June 30, 2019 and 2020, we did not have a share buyback program in effect. Our last share buyback program was approved on September 20, 2016 for a term of 18 months from September 21, 2016, ending, therefore, on March 21, 2018.

 

As of June 30, 2020, our fully paid capital stock was R$699.8 million, divided into 62,104,301 registered book-entry common shares, without par value. Our bylaws authorize our board of directors to increase our capital stock up to R$3.0 billion without shareholder approval. Any capital increase in excess of such amount must be approved at a shareholders’ meeting.

 

Corporate Purpose

 

Article 3 of our bylaws define our corporate purposes as including: (i) the development of agricultural and forestry activities and the rendering of services directly or indirectly related thereto; (ii) the purchase, sale and lease of real estate properties in agricultural and urban areas; (iii) the import and export of agricultural products, supplies and inputs; (iv) the brokering of real estate transactions of any kind; (v) the holding equity investments in other companies and business ventures of any kind related to our corporate purpose, either in Brazil or abroad; and (vi) the management of our own or third-party assets.

 

Share Register

 

Banco Itaú Unibanco S.A. holds the book-entry register of our common shares. Share transfers are made upon written instructions of the transferor or court order, by charging the transferor’s share account and crediting the transferee’s account by the appropriate amount.

 

Rights of Common Shares

 

Our capital stock consists exclusively of common shares. Each of our common shares entitles its holder to one vote at our shareholders’ meetings, and to receive pro rata dividends or other distributions. See “Item 8—Financial Information—Dividends and Dividend Policy” for a description of distribution rights in connection with our common shares. Holders of our common shares also have the right, subject to certain exceptions provided for in Brazilian corporate law, but not the obligation, to subscribe to our future capital increases. Our shareholders are also entitled to share ratably our remaining assets in case we are liquidated, after payment of all our liabilities.

 

Brazilian corporate law awards our shareholders the following rights, which cannot be circumvented by bylaws amendments or majority resolutions at shareholders’ meetings: (i) the right to participate in the distribution of profits; (ii) the right to participate equally and ratably in any remaining residual assets in the event of liquidation of the company; (iii) preemptive rights in the event of issuance of shares, convertible debentures or subscription warrants, except in certain specific circumstances, as set forth in Brazilian corporate law (see “Item 10—Additional Information— Preemptive rights”); (iv) the right to hold our management accountable, in accordance with the provisions of Brazilian corporate law; and (v) the right to withdraw in the cases specified in Brazilian corporate law, including in the events of merger or consolidation, such as those described in “Item 10— Additional Information—Withdrawal and Redemption Rights—Withdrawal Rights.”

 

Furthermore, pursuant to our bylaws and in accordance with CVM and Novo Mercado rules and regulations, the direct or indirect transfer of our control, either through one or a series of related transactions, is contingent upon the acquirer making a tender offer to acquire all of our shares.

 

As long as we are listed on the Novo Mercado, we may not issue preferred shares or participation certificates, and should we decide to delist from the Novo Mercado, we must carry out a tender offer to acquire all shares traded on stock markets. For further information, see “Item 10—Additional Information—Delisting from the Novo Mercado” below.

 

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Warrants

 

On March 15, 2006, our board of directors approved the issuance of warrants to our founding shareholders proportionally to their subscription of shares during our capital increases. See “Item 10—Additional Information—Description of Outstanding Warrants.”

 

Shareholders’ Meetings

 

Pursuant to Brazilian corporate law, our shareholders have the power to take any action and approve any resolutions related to our activities at shareholders’ meetings, provided that such meetings have been convened pursuant to the terms and procedures described in Brazilian corporate law and in our bylaws. It is the exclusive prerogative of the annual shareholders’ meeting (assembleia geral ordinária) to review management’s account of corporate activities; approve our financial statements; and determine the allocation of our net income and the payment of dividends with respect to the previous fiscal year. Members of our board of directors and fiscal council are also usually appointed at the annual shareholders’ meeting, although such appointments may also take place at special shareholders’ meetings.

 

Our shareholders may also convene special shareholders’ meetings, which may be held concurrently with the annual shareholders’ meeting or at any time of the year.

 

The following actions, among others, may be taken exclusively at shareholders’ meetings: (i) approval of amendments to the bylaws; (ii) approval of management accounts and financial statements; (iii) appointment and dismissal of members of our board of directors and fiscal council; (iv) the establishment of the aggregate compensation of the board of directors, executive officers and fiscal council; (v) approval of the company’s dissolution, motion for bankruptcy or judicial or out-of-court reorganization proceedings, liquidation, merger, redistribution of assets and liabilities, or consolidation with any other company, and any share mergers; (vi) approval of pro rata share distributions to current shareholders, stock splits and reserve stock splits; (vii) approval of stock option plans and similar arrangements for our management and employees, and for the managers and employees of our direct or indirect subsidiaries; (viii) approval of management’s proposals regarding allocation of net income and distribution of dividends; (ix) approval of capital increase over the limit authorized in our bylaws; (x) appointment of liquidators and members of the fiscal council during liquidation proceedings; (xi) approval of the cancellation of our registration as a publicly-held company at CVM; (xii) approval of our delisting from the Novo Mercado listing segment; (xiii) approval of engagement of an appraiser to evaluate the value of our shares in case of cancellation of our registration as a public company at CVM or our delisting from the Novo Mercado listing segment; and (xiv) the passing of resolutions on any matter submitted to the shareholders’ meeting by our board of directors.

 

Shareholders’ meetings are not allowed to circumvent certain specific shareholder rights enumerated in Brazilian corporate law. See “Item 10— Additional Information—Rights of Common Shares,” above.

 

Quorum

 

As a general rule, Brazilian corporate law provides the need of shareholders representing at least 25% of our voting capital stock in order for a company to able to convene a shareholders’ meeting on first call, except if the meeting is called to amending our bylaws, in which case two thirds of our voting capital stock shall be required on first call. In either case, if the applicable quorum is not reached on first call, any percentage will suffice to convene the meeting on second call.

 

Approval of resolutions at shareholders’ meetings generally requires the affirmative vote of shareholders representing at least the majority of common shares attending the meeting, either in person or represented by a proxy. Non-voting shares are disregarded for purposes of calculating the majority.

 

The Novo Mercado listing rules require, for the approval of certain issues, such as to retain a specialized firm to prepare a valuation report with respect to the value of our common shares in the event of delisting from the Mercado Novo listing segment or cancelling our registration as a publicly- held company, the affirmative vote of shareholders representing at least the majority of our issued and outstanding common shares (the “Outstanding Shares”) present at a shareholders’ meeting. In such events, the shareholders’ meeting must count on the presence of shareholders representing at least 20% of our Outstanding Shares on first call, or on the presence of any percentage of our Outstanding Shares on second call, with blank votes not taken into account and with one vote entitled to each share. For these purposes, Outstanding Shares within the meaning set forth in the Novo Mercado Participation Agreement and Novo Mercado listing segment regulations means all our issued and outstanding shares, provide, however, with the exclusion of, (i) the shares held by any controlling shareholders or by affiliates of such controlling shareholders, (ii) the shares held by our managers, and (iii) treasury shares. See “Item 10—Additional Information—Delisting from the Novo Mercado” for additional information on this matter.

 

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Notice of Shareholders’ Meetings

 

Brazilian corporate law requires that previous notice of any shareholders’ meeting be published on three different dates on federal or state official gazette and another newspaper of high circulation in the state of the corporate offices. As a general rule, our company publishes meetings notices on the Official Gazette of the state of São Paulo (Diário Oficial do Estado de São Paulo) and the newspaper O Estado de São Paulo. The first notice must be published no later than 15 days prior to the date of when meeting on first call is schedule to take place, and no later than eight days in advance to the date of the shareholders’ meeting on second call. In certain circumstances, the CVM may require that the first notice for the shareholders’ meeting to be published no later than 30 days prior to the shareholders’ meeting. Nevertheless, CVM may also require, upon shareholder request, up to 15 additional days between such prior notice and any special shareholders’ meeting, in order to enable such shareholder to having enough time to analyze the matters to be discussed at the meeting. In addition, our bylaws require that a shareholders’ meeting to be convened to decide on the cancellation of our registration as a public company with the CVM or our delisting from the Novo Mercado listing segment must be called at least 30 days prior to the shareholders’ meeting. The notice on the shareholders’ meeting must contain the agenda, date and venue of the meeting, and (if applicable) the nature of the proposed bylaws amendments.

 

Venue

 

Our shareholders’ meetings take place at our head office in the city of São Paulo, in the state of São Paulo. Brazilian corporate law allows our shareholders to hold meetings in another location in the event of force majeure, provided that the meetings are held in the city of São Paulo and the relevant notice includes a clear indication of the place where the meeting will occur.

 

Who May Call our Shareholders’ Meetings

 

As a general rule, Shareholders’ meetings are called by our board of directors, although they may also be called by the following: (i) any shareholder, if our directors fail to call a shareholders’ meeting within 60 days after the date they were required to do so under applicable laws and our bylaws; (ii) holders of at least 5% of our capital stock, if our directors fail to call a meeting within eight days following receipt of a justified request to call the meeting by those shareholders, indicating the proposed agenda; (iii) holders of at least 5% of our capital stock if our directors fail to call a meeting within eight days after receipt of a request to call the meeting to establish the fiscal council; and (iv) our fiscal council (if already established), if our board of directors fails to call an annual shareholders’ meeting within one calendar month after the date it was required to do so under applicable laws. The fiscal council (if already established) may also call a special shareholders’ meeting if it believes that there are important or urgent matters to be addressed.

 

Conditions of Admission to a Shareholders’ Meeting

 

In order to attend and vote at shareholders’ meetings, shareholders must identify themselves and, 72 hours before the meeting, provide evidence of proper title to the voting shares, issued by the financial institution responsible for the bookkeeping of our shares, no earlier than five days before expiration off the 72-hour deadline mentioned herein. A shareholder may be represented at a shareholders’ meeting by a proxy, provided that such proxy has been appointed less than one year before the meeting. Only attorneys, financial institutions, other shareholders, and our executive officers and directors can act as proxies for our shareholders. An investment fund must be represented by its officers.

 

Management and Fiscal Council

 

Pursuant to our bylaws, and in accordance with Brazilian corporate law and the Novo Mercado listing rules, we are governed by our board of directors (conselho de administração) and executive officers (diretoria).

 

Our bylaws require that our board of directors comprise of at least of five and not less than to nine directors. Currently, our board of directors has nine members, of which four are independent directors under the Novo Mercado listing rules, unrelated to our principal shareholders or to us. Our board members are elected by our shareholders at the annual shareholders’ meeting, for a period of two consecutive years, reelection being permitted. We have also recently suggested the inclusion of two alternate members to comprise the board of directors in the event any of the sitting members resign.

 

According to our bylaws, our board of directors may establish one or more technical or advisory committees for specific purpose and with specific duties, whose members may or may not include our officers or executive officers. Our board of directors must establish the rules applicable to those committees, including rules for their composition, mandates, compensation and operation. Such committees are advisory committees and not deliberative by nature.

 

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Brazilian corporate law permits cumulative voting upon the request of holders of at least 10% of our voting capital. Each share is granted as many votes as the number of board seats, and each shareholder has the option to cast his or her votes for one or more candidates. However, pursuant to CVM Instruction No. 282, of June 26, 1998, the threshold to trigger multiple voting rights in publicly held corporations may be reduced in proportion to the amount of capital stock, ranging from 5% to 10%. Shareholders representing 5% of our voting capital may request the adoption of cumulative voting rights.

 

Under applicable law, if there is no request for cumulative voting, the shareholders’ meeting will vote based on a previously registered list, assuring shareholders that individually or collectively hold at least 15% of our common shares, in a separate vote, the right to elect one director and his or her alternate. Notwithstanding the foregoing, at a meeting held on November 4, 2006, CVM Board has decided to maintain the interpretation of section 141, fifth paragraph, of Brazilian Federal Law No. 6,404/76 expressed at the meeting held on November 8, 2005 (CVM Case RJ2005/5664), which, in those cases whereupon the Company has only issued shares with voting rights, the majority of holders holding at least 10% of the total voting shares will have the right to elect and remove a member and his alternate from the Board of Directors, by a separate vote at the general meeting, excluding the controlling shareholder.

 

If cumulative voting is requested, each shareholder may vote for one or more board members. Each common share will entitle its holder to one vote in the relevant shareholders’ meeting and each shareholder may cast votes for members as they wish.

 

Our bylaws require that we have two to six executive officers. At the date of this annual report, we have two executive officers. They are elected by our directors for a period of one year, with the possibility of reelection. Pursuant to Brazilian corporate law, executive officers must be residents of Brazil, but do not need to be shareholders.

 

Pursuant to our bylaws, our fiscal council is permanent, has the powers and attributions conferred upon it by law and is also incumbent upon exercising the role of Audit Committee, in accordance with the Sarbanes Oxley Act and the rules issued by the SEC. The fiscal council members are elected at the annual shareholders’ meeting with a term of office that extends through the following annual shareholders’ meeting. Our fiscal council shall be comprised by three to five effective sitting members and their alternates, who may or may not be shareholders. All members of our fiscal council are also required to sign an agreement to comply with the Novo Mercado rules prior to assuming their roles. The current members of our fiscal council will exercise their duties until the annual shareholders’ meeting to be held in 2021 to approve the management accounts and financial statements for the fiscal year ending June 30, 2021.

 

Transactions in Which Directors Have a Conflict of Interest

 

Pursuant to Brazilian corporate law, our directors and executive officers may not:

 

  ● give any gifts at our expense, except for such reasonable gifts as are for the benefit of our employees or of the community in which we participate, upon approval by our board of directors;

 

  ● receive, by virtue of his or her position, any direct or indirect personal benefit from third parties without authorization in our bylaws or by our shareholders at a shareholders’ meeting;

 

  ● borrow money or property from us or use our property, services or credit for his or her own benefit or for the benefit of a company or third party in which he or she has an interest, without the prior approval of our shareholders at a shareholders’ meeting or of our board of directors;

 

  ● take part in a corporate transaction in which he or she has an interest that conflicts with our interests or in the deliberations undertaken by our directors on the matter;

 

  ● take advantage of any commercial opportunity for his or her own benefit or for the benefit of a third party at the expense of the company when he or she was informed about such opportunity by virtue of his or her position as a director;

 

  ● fail to disclose a business opportunity in our interests with a view to exploiting the opportunity for personal gain, or for the benefit of a third party; and

 

  ● acquire, in order to resell for profit, a good or right that is essential to our business operations, or that we intend to acquire for ourselves.

 

The compensation of our directors is determined by our shareholders at the annual shareholders’ meeting that approves the previous fiscal year’s financial statements.

 

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Allocation of Net Income and Dividend Distributions

 

Before each annual shareholders’ meeting, our directors and executive officers are required to recommend how to allocate our net income, from the preceding financial year (if any). This allocation is subject to the approval of our shareholders. Brazilian corporate law defines “net income” for any particular financial year as net income after income and social contribution taxes for that financial year, net of any accumulated losses from prior financial years and any amounts allocated to employees’ and management’s participation in our net income in such financial year.

 

According to our bylaws and Brazilian corporate law, net income for any given financial year will be allocated as follows: (i) 5% for the formation of a legal reserve according to Brazilian corporate law, which is subject to a maximum limit of 20% of our capital stock (in addition, if for any given financial year, the total amount of the legal reserve plus any amounts of capital reserves exceed 30% of our capital stock, additional contributions to the legal reserve will not be mandatory); (ii) payment of mandatory dividends, which cannot be less than 25% of our adjusted net income. After payment of mandatory dividends, shareholders may decide to allocate outstanding net income to form a statutory expansion and investment reserve in accordance with the additional requirements provided for in our bylaws; and (iii) the remaining portion of the adjusted net income may be allocated for investment, based on the budget approved by our general shareholders’ meeting. However, the remaining balance of the income reserves, excluding reserves for unrealized profits and contingencies, must not exceed the value of our capital stock. If this limit is reached, a general shareholders’ meeting will be held to determine whether such excess amount shall be allocated as a capital increase or a distribution of dividends.

 

The general shareholders’ meeting may grant to our directors and executive officers a participation in the distribution of our profits, after deducting accumulated losses and provisions for income and social contribution taxes, in accordance with applicable law.

 

Withdrawal Rights

 

According to Brazilian corporate law, shareholders are entitled to withdrawal rights if they dissent from the approval of the following actions at any shareholders’ meeting: (i) the redistribution of assets and liabilities (pursuant to the conditions described below); (ii) reduction in our mandatory dividends; (iii) change of our corporate form or purpose; (iv) our merger into, or consolidation with, another company (as described below); and (v) our participation in a corporate group, as defined in Brazilian corporate law, except in the event our shares are widely held and liquid, as described below; or (vi) our acquisition of the control of any company, if the acquisition price exceeds the limits established by Brazilian corporate law, except in the event our shares are widely held and liquid, as described below.

 

The redistribution of assets and liabilities will only trigger withdrawal rights if it results in one of the following: (i) a change in our corporate purpose, unless the spun-off assets and liabilities are transferred to an entity whose principal business purpose is consistent with our corporate purpose; (ii) a reduction of the minimum mandatory dividend to be paid to shareholders; or (iii) our participation in a corporate group (as defined in Brazilian corporate law).

 

In cases where we: (i) merge into, or consolidate with, another company; (ii) become part of a corporate group (as defined in Brazilian corporate law); (iii) acquire all shares of a company in order to make such company our wholly-owned subsidiary, or our shareholders sell all of our shares to another company in order to make us a wholly-owned subsidiary of such company, pursuant to Article 252 of Brazilian corporate law; or (iv) acquire control of any company at an acquisition price that exceeds the limits established under Article 256, paragraph 2 of Brazilian corporate law, our shareholders will not be entitled to withdrawal rights, if our common shares are (a) part of the Bovespa Index or another stock exchange index, as defined by the CVM; and (b) widely held, such that any controlling shareholders and their affiliates jointly hold less than 50% of the type or series of shares being withdrawn.

 

The right to withdraw expires 30 days after the publication of the minutes of the relevant shareholders’ meeting. We are entitled to reconsider any action giving rise to withdrawal rights for 10 days after the expiration of the aforementioned period if we determine that the redemption of the shares of dissenting shareholders would jeopardize our financial situation.

 

Article 45 of Brazilian corporate law describes the amounts to be paid to shareholders who exercise their withdrawal rights. As a general rule, the withdrawing shareholder will receive the value of the shares, based on the most recent audited balance sheet approved by our shareholders, or, if lower, the economic value of the shares, based on an evaluation report prepared in accordance with Brazilian corporate law. If the resolution giving rise to withdrawal rights is passed more than 60 days after the date of our most recent balance sheet, dissenting shareholders may request that the shares be valued in accordance with a new balance sheet dated no more than 60 days prior to the date of the resolution. In such case, we are obligated to pay 80% of the share value according to the most recent balance sheet approved by our shareholders, and the balance within 120 days following the date of the resolution of the shareholders’ meeting that gave rise to the withdrawal rights.

 

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Liquidation

 

We may be liquidated in accordance with the provisions of Brazilian law. In the event of our extrajudicial liquidation, a shareholders’ meeting will determine the manner of our liquidation, appoint our liquidator and our fiscal council that will function during the liquidation period.

 

In the event of our liquidation, the assets available for distribution to our shareholders would be distributed to our shareholders in an amount equal to their pro rata share of our legal capital. If the assets to be so distributed are insufficient to fully compensate our all of our shareholders for their legal capital, each of our shareholders would receive a pro rata amount (based on their pro rata share of our legal capital) of any assets available for distribution.

 

Redemption

 

According to Brazilian corporate law, we may redeem our shares pursuant to a resolution adopted at an extraordinary shareholders’ meeting by shareholders representing at least 50% of our capital stock. The redemption may be paid with our retained earnings, revenue reserves or capital reserves.

 

Preemptive Rights

 

Except as described below, our shareholders have a general preemptive right to participate in any issue of new shares, in proportion to its holding at such time. However, the conversion of debentures into shares, the granting of options to purchase or subscribe for shares and the issue of shares as a result of the exercise of such options, are not subject to preemptive rights. Our shareholders are also entitled to preemptive rights in any issue of convertible debentures or offerings of shares or warranties issued by us. Shareholders have a period of at least 30 days after the publication of notice of the issue of shares, convertible debentures and warrants to exercise their preemptive rights. In addition, such preemptive rights may be transferred or disposed of for value. Under the terms of Article 172 of Brazilian corporate law and our bylaws, our board of directors may exclude preemptive rights or reduce the exercise period with respect to the issue of new shares, debentures convertible into shares and warrants up to the limit of our authorized share capital, if the distribution of those securities is conducted in a stock exchange, or through a public offering, an exchange offer for shares or tender offer the purpose of which is to acquire control of another company. Please refer to “Item 3—Key Information—Risk Factors—Risks Relating to the Offering and Our Common Shares—A holder of our common shares not residing in Brazil might be unable to exercise preemptive rights with respect to the common shares” for additional information on this matter.

 

Insider Trading Regulations

 

We comply with the restrictions on insider trading set forth in CVM Instruction No. 358, of January 3, 2002, as amended. The following paragraphs contain a brief summary of certain of such restrictions.

 

An issuer, any controlling shareholders, directors, officers and other members of management are prohibited from trading in any securities issued by our company or derivatives related to such securities, if (i) they are in possession of material information regarding our business, and such information has not been publicly disclosed; (ii) a transaction is pending for the acquisition or sale of shares of our capital stock, by our company, subsidiaries or affiliates, or an option or mandate has been granted in connection with any of such transactions; or (iii) our company intends to participate in a merger, consolidation or corporate reorganization, the redistribution of assets and liabilities assets or change into a different form of legal entity; and (iv) such trading activity would take place in the 15-day period prior to the filing of our quarterly financial statements (ITR) or annual financial statements (DFP) with the CVM.

 

Individuals who held management positions at the company and gained access to material information originating from developments occurred before their departure from the company are also prohibited from engaging in such trading activities, from the date of their departure from the company until (i) six months after their departure; or (ii) public disclosure of the material information; provided that trading will remain prohibited as long as it may interfere with our business or adversely affect our financial condition or that of our shareholders.

 

Acquisition of Treasury Stock

 

An issuer cannot acquire shares of its own capital stock, to hold as treasury stock or for cancellation purposes, if this acquisition would: (i) reduce the issuer’s capital stock; (ii) require the use of funds in excess of the issuer’s profits or available reserves, as described in its most recent balance sheet; (iii) manipulate the stock price, or use of any unfair trading practice; or (iv) acquire shares that had not been fully paid by the respective holder, or that were owned by any controlling shareholders. Furthermore, an issuer may not acquire shares of its own capital stock if a tender offer for its shares is pending.

 

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The amount of shares of our capital stock held by our company, or maintained by our affiliates and subsidiaries in treasury cannot exceed 10% of the total outstanding shares of our capital stock.

 

We may only purchase shares of our own capital stock at a stock exchange. Private purchases are only permitted if previously approved by the CVM, or if we have cancelled our registration as a public company with the CVM. We can purchase and sell put and call options on our shares without restrictions at any time.

 

 

Restrictions on Activities Inconsistent with our Corporate Purpose 

 

Any transactions in which we participate that are inconsistent with our corporate purpose are not enforceable against our company, pursuant to Brazilian corporate law, including any forms of collateral or guarantees unrelated to our corporate purpose or in violation of our bylaws.

 

Disclosure of Trading of our Shares by an Issuer, any Controlling Shareholders, Directors, Officers or Members of the Fiscal Council

 

An issuer’s directors and officers and members of its fiscal council, when active, as well as members of any other technical or advisory committee, are required to disclose to its investor relations officer, who will disclose to the CVM and B3, the number and type of securities issued by the issuer, its publicly-held subsidiaries or controlled companies, including derivatives (in case of any controlling shareholders) held by them or by persons related to them, as well as any alteration in their respective interests within 10 days as from the end of the month in which trading takes place.

 

In addition, the Novo Mercado listing rules require any controlling shareholders to provide the same information in relation to securities issued by the issuer, including derivatives, and to disclose their plans for future trading. Information on trading of an issuer’s securities should include:

 

  ● name and identification of the acquirer;

 

  ● number, price, kind or class, in the event of traded shares, or characteristic, in the event of other securities; and

 

  ● form of acquisition (private transaction, trading on stock exchange, etc.).

 

Pursuant to CVM Instruction No. 358, if an issuer’s controlling shareholders or any person or company, whether individually or together with a group of persons or entities sharing similar interests, should directly or indirectly increase their interest in an issuer’s capital stock by at least 5% percent, such persons or entities must disclose to us the following information:

 

  ● the name and identification of the person providing the information;

 

  ● the number, price, kind or class, in the event of acquired shares, or characteristics, in the event of other securities;

 

  ● form of acquisition (private transaction, trading on stock exchange, etc.);

 

  ● the reasons and purpose of the transaction; and

 

  ● information regarding any agreement regulating the exercise of voting rights or the purchase and sale of our securities.

 

Disclosure of Information

 

We are subject to the reporting requirements established by Brazilian corporate law and the regulations of the CVM. In addition, as a result of our listing on the Novo Mercado, we must comply with the disclosure requirements under Novo Mercado regulations.

 

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Information Required by the CVM

 

Brazilian corporate law, securities regulations of the CVM and the rules for listing on the Novo Mercado require that publicly held corporations file the following periodic information with the CVM and the B3:

 

  ● financial statements prepared in accordance with accounting principles generally accepted in Brazil (“Brazilian GAAP”) and related management and auditors’ reports, within three months from the end of the fiscal year or on the date on which they are published or made available to our shareholders, whichever occurs first, together with the Demonstrações Financeiras Padronizadas (a report on a standard form containing relevant financial information derived from our financial statements required to be filled out by us and filed with the CVM);

 

  ● notices, filed on the same date as their publication, of our annual shareholders’ meeting;

 

  ● a summary of the decisions made at annual shareholders’ meetings, filed on the day following the meeting;

 

  ● a copy of the minutes of the annual shareholders’ meeting, filed within ten days from the date the meeting is held;

 

  ● ITR, a quarterly report on a standard form containing our relevant quarterly corporate, business and financial information, together with a special review report issued by our independent auditor, filed within 45 days from the end of each quarter (except for the last quarter of each year) or upon disclosure of such information to shareholders or third parties, whichever occurs first;

 

  ● Formulário de Referência, filed within five months from the end of each corporate year and in the event a request to conduct public offering is filed with the CVM;

 

  ● Formulário Cadastral, which must be updated within seven business days if any of the information contained therein is modified;

 

  ● management report within one month before a shareholders’ meeting is scheduled to occur, giving notice that certain management documents, as required by Brazilian corporate law, are available to shareholders; and

 

  ● any documents deemed necessary for shareholders to exercise their voting rights.

 

In addition to the foregoing, we must also file the following information with the CVM and the B3:

 

  ● notices, filed on the same date of their publication, of our extraordinary or special shareholders’ meetings;

  

  ● a summary of the decisions made at extraordinary or special shareholders’ meetings, filed on the day following the meeting;

 

  ● minutes of our extraordinary or special shareholders’ meetings, filed within ten days from the date they are held;

 

  ● a copy of any shareholders’ agreement, filed on the date on which it is registered with us;

 

  ● any press release giving notice of material facts, filed on the date the release is published in the press;

 

  ● information on any filing for corporate reorganization, the reason for such filing, special financial statements prepared for obtaining a legal benefit, and, if applicable, any plan for payment of holders of debentures, as well as copies of any judicial decision granting such request, filed concurrently with the corporate reorganization and on the date we take notice of it;

 

  ● information on any bankruptcy filing, on the same day we become aware of it, or the filing of a judicial claim, as applicable;

 

  ● a copy of any judicial decision granting a bankruptcy request and appointing a bankruptcy trustee, filed on the date we take notice of it; and

 

  ● other information as requested by the CVM.

  

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Information Required by the B3 from Companies Listed on the Novo Mercado

 

In addition to the disclosure obligations imposed by Brazilian corporate law and the CVM, we also must comply with the following additional disclosure requirements under Novo Mercado regulations:

 

  ● no later than six months following our listing on the Novo Mercado, we must disclose financial statements and consolidated financial statements at the end of each quarter (except the last quarter of each year) and at the end of each fiscal year, including a cash-flow statement which must indicate, at a minimum, the changes in our cash and cash equivalents, divided into operating, finance and investment cash flows;

 

  ● from the date on which we release our financial statements relating to the second fiscal year following our listing on the Novo Mercado we must, no later than four months after the end of the fiscal year: (i) prepare our annual financial statements and consolidated financial statements, if applicable, in accordance with U.S. GAAP, or IFRS, in reais or U.S. dollars, in the English language, together with (a) management reports, (b) notes to the financial statements, including information on net income and shareholders’ equity calculated at the end of such fiscal year in accordance with Brazilian GAAP, as well as management proposals for allocation of net profits, and (c) our independent auditors’ report; or (ii) disclose, in the English language, complete financial statements, management reports and notes to the financial statements, prepared in accordance with Brazilian corporate law, accompanied by (a) an additional explanatory note regarding the reconciliation of year-end net income and shareholders’ equity calculated in accordance with Brazilian GAAP and U.S. GAAP or IFRS, as the case may be, which must include the main differences between the accounting principles used, and (b) the independent auditors’ report; and

 

  ● from the date on which we release our first financial statements prepared as provided above, no later than 15 days following the term established by law for the publication of quarterly financial information, we must disclose, in its entirety, our quarterly financial information translated into the English language or disclose our financial statements and consolidated financial statements in accordance with Brazilian GAAP, U.S. GAAP or IFRS as provided above, accompanied by the independent auditors’ report.

 

In addition, we must disclose the following information together with our ITR:

 

  ● our consolidated balance sheet, consolidated statement of operations, and a discussion and analysis of our consolidated performance, if we are obliged to disclose consolidated financial statements at year-end;

 

  ● any direct or indirect ownership interest exceeding 5% of our capital stock, considering any ultimate individual beneficial owner;

 

  ● the number and characteristics, on a consolidated basis, of our shares held directly or indirectly by our principal shareholders, members of our board of directors, board of executive officers and fiscal council;

 

  ● changes in the numbers of our shares held by the principal shareholders, members of our board of directors, board of executive officers and fiscal council in the immediately preceding 12 months;

 

  ● in an explanatory note, our cash-flow statement and consolidated cash-flow statement, which should indicate the cash flow changes in cash balance and cash equivalent, separated into operating, finance and investment cash flows;

 

  ● the number of free-float shares, and their percentage in relation to the total number of issued shares; and

 

  ● the existence of arbitration provision for disputes arising between us and principal shareholders, directors, executive officers and members of the fiscal council before the Market Arbitration Chamber of B3.

 

The following information must also be included in the company’s Formulário de Referência:

 

  ● information relating to the ownership interest exceeding 5% of our capital stock, number and characteristics, on a consolidated basis, of the company’s shares directly or indirectly held by the principal shareholders and members of the board of directors, executive officers and fiscal council;

 

  ● changes in the number of securities held by such persons within the immediately preceding 12 months;

  

  ● the number of free-float shares and their respective percentage in relation to the total amount of shares issued; and

 

  ● submission to arbitration.

  

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Disclosure of Material Information

 

According to Law No. 6,385, of December 7, 1976, as amended, and the rules published by the CVM, we must disclose any material information (fato relevante) related to our business to the CVM and the B3 and publish a notice of such material information. Material information consists of any decision by the principal shareholders, any resolution taken by our board of directors, by the executive officers or by the shareholders in a shareholders meeting, or any other act or fact of political, technical, managerial, economic or financial nature occurring or related to us that could materially influence the price of our securities, the decision of investors to buy, sell or hold our securities, or the investors’ decision to exercise any rights deriving from our securities.

 

Under special circumstances, we may request confidential treatment by the CVM of certain material developments affecting us.

 

Going Private Process

 

A public company may become a private company if it or any controlling shareholders conduct a public tender offer for the acquisition of all of the issuer’s outstanding common shares in accordance with the rules and regulations of Brazilian corporate law, the CVM and the Novo Mercado listing segment which, among other things, require that the offering price be the fair value of our common shares, as defined pursuant to a valuation report, and that holders of common shares representing more than two thirds of the outstanding common shares should have agreed to the delisting or accepted the offer; provided, however, that for such purposes outstanding common shares shall mean common shares the holders of which shall have enrolled to participate in the offer.

 

The minimum offering price shall correspond to the fair value of our common shares, as determined in a valuation report prepared by specialized and independent firm of recognized experience.

 

Pursuant to Brazilian corporate law, fair value is defined as the valuation of our Company, determined based on individually or in the aggregate, shareholders’ equity, shareholders’ equity valued at market price, discounted cash flow, comparison by multiples, the market price of shares issued by us, or any other valuation method accepted by the CVM. Shareholders holding at least 10.0% of our outstanding common shares may require our management to call a special shareholders’ meeting to determine whether to perform another valuation using the same or a different valuation method. This request must be made within 15 days following the disclosure of the price to be paid for the common shares in the public offering. The shareholders that make such request, as well as those voting in its favor, must reimburse us for any costs involved in preparing the new valuation, if the new valuation price is not higher than the original valuation price. If the new valuation price is higher than the original valuation price, the public offering must either be cancelled or carried out at the higher price, and this decision must also be disclosed to the market.

 

Pursuant to our bylaws and the Novo Mercado listing rules, the minimum price per share in the public offer to be conducted to purchase our outstanding common shares for purposes of going private, must correspond to the fair value of our common shares as determined in a valuation report prepared by a specialized and independent firm of recognized experience, chosen at a shareholders’ meeting from a list of three institutions presented by our board of directors, pursuant to a decision of our Company, our directors and officers or shareholders.

 

Delisting from the Novo Mercado

 

We may at any time delist our common shares from the Novo Mercado, provided that shareholders representing the majority of our common shares approve the action and that we give at least 30 days written notice to the B3. Our delisting from the Novo Mercado would not result in the loss of our registration as a public company with the B3.

 

If the shareholders’ meeting decides to delist in order for an issuer’s common shares to be tradable outside the Novo Mercado, or as a result of a corporate reorganization in which the surviving company is not listed on the Novo Mercado, the issuer’s controlling shareholders or group of controlling shareholders should conduct a tender offer to purchase the issuer’s outstanding common shares. In any such event, the offering price per common share should be no less than the fair value of our common shares, as determined in a valuation report prepared by a specialized and independent firm of recognized experience, chosen at a shareholders’ meeting from a list of three institutions presented by our board of directors, pursuant to a decision of shareholders representing at least the majority of the issuer’s outstanding shares present at such a shareholders’ meeting, with blank votes not taken into account and with one vote entitled to each share. All the expenses and costs incurred in connection with the preparation of the valuation report must be paid by any controlling shareholders or the issuer, as offerors.

 

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In the event of delisting from the Novo Mercado, any controlling shareholders must conduct a tender offer to acquire common shares from the other shareholders at fair value, pursuant to the Novo Mercado listing rules and according to applicable legislation and regulation. Such tender offer must be disclosed to the B3 and the market immediately after the company receives notice regarding the termination of the agreement for participation in the Novo Mercado listing segment.

  

According to the Novo Mercado listing rules, in the event of a transfer of our control within 12 months following our delisting from the Novo Mercado, the acquirer of control and the seller of control must offer to purchase the common shares of all other holders of our common shares for the same price, terms and conditions offered to the seller of control, adjusted for inflation. Furthermore, in the event the price received by any controlling shareholders for their common shares is higher than the value of the public offering conducted, the selling controlling shareholders and the acquirer will be required to jointly pay the difference to the acceptors of the respective public offering.

 

If our common shares are delisted from the Novo Mercado, we will not be permitted to have common shares listed on the Novo Mercado for a two-year period following the delisting date, unless there is a change in our control following this delisting from the Novo Mercado.

 

Public Tender Offers

 

Our by-laws provide that if any of the above-mentioned cases occur simultaneously, a single public tender offer will be conducted provided that the procedures of all types of public tender offers are compatible, the target shareholders are not adversely affected and the CVM authorizes it.

  

In addition, our by-laws permit that we or the shareholders responsible for the public tender offer assure its execution through any shareholder, third party and, if applicable, ourselves. Nevertheless, we or the responsible shareholder, as the case may be, are still responsible for the public tender offer until its completion.

 

Arbitration

 

We, our shareholders, our directors and officers, and the members of our fiscal council, when active, should submit to arbitration for any dispute relating to the application, legality, effectiveness, interpretation, violation and effects of violation of the provisions in the agreement for participation in the Novo Mercado listing segment, and to the Novo Mercado listing rules, the arbitration regulation instituted by the B3, the provisions of Brazilian corporate law, our bylaws, the rules of the CMN and the Central Bank, the regulations of the CVM and the B3 and other rules generally applying to the Brazilian capital markets. Any such dispute should be settled by arbitration carried out before B3 Arbitration Chamber.

 

Change of Control

 

According to the Novo Mercado listing rules, the sale of control over an issuer, in one transaction or in a series of successive transactions should contemplate an obligation by the acquirer of control to conduct a tender offer for the acquisition of all other outstanding common shares on the same terms and conditions offered for disposition of control so as to assure equal treatment among all of our shareholders. For such purposes, any selling controlling shareholders and the acquirer shall inform the CVM and the B3 of the price and other conditions of such sale.

 

A tender offer is also required:

 

  ● when there is a significant assignment of share subscription rights or rights in other securities convertible into an issuer’s common shares, which results in the transfer of its control;

 

  ● in case of an indirect transfer of an issuer’s control, through a transfer of control over any controlling shareholders; and

 

  ● in case a shareholder acquires the issuer’s control pursuant to a private transaction for purchase of its common shares. In this event, the acquiring shareholder must conduct a tender offer for the acquisition of all the issuer’s outstanding common shares on the same terms and conditions offered disposition of control and must also reimburse the counterparties from whom it has acquired its common shares on the stock exchange in the six-month period preceding the transaction that resulted in a change in control. The reimbursement amount corresponds to the positive difference between the price paid to the seller of control and the adjusted price paid in transactions carried out on the stock exchange during this six-month period.

 

The buyer, if applicable, should take all necessary measures to reconstitute the minimum 25% free float within six months of the acquisition.

 

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The controlling shareholders may not transfer the common shares to the purchaser of our control, and the issuer may not register the transfer of such common shares, if the buyer fails to execute the controlling shareholders’ consent agreement (Termo de Anuência dos Controladores). Moreover, the issuer will not register any shareholders’ agreement that regulates the exercise of control rights until the signatories thereto execute the controlling shareholders’ consent agreement.

 

Diffused Control

 

Control of us is deemed diffused if exercised by (i) a shareholder holding less than 50% of our capital stock; (ii) shareholders jointly holding more than 50% of our capital stock, provided that each shareholder holds less than 50% of our capital stock, and (a) their respective ownership of our common shares is not subject to voting rights agreement, (b) they are not under common control and (c) do not represent a common interest; and (iii) shareholders holding less than 50% of our capital stock who have executed a shareholders’ agreement in respect of their ownership of our common shares.

 

Duties and Responsibilities of Controlling and Others Shareholders

 

If one shareholder or group of shareholders exercises in a permanent manner control over us, such shareholder or group of shareholders will be subject to the duties and responsibilities of the Brazilian corporate law. On the other hand, if there is no such shareholder or group of shareholders, we will be subject to diffused control. The diffused control is always transitory and shareholders can exercise their control over us by using their voting rights, if there are shareholders in a sufficient number who can influence the decisions taken at a general shareholders meeting. If our control is diffused according to the Brazilian corporate law, there are no specific liability rules for each group of shareholders even if one shareholder or group of shareholder effectively exercises the diffused control, since this diffused control is exercised with the approval of the other shareholders. Nevertheless, the rules concerning shareholders’ liability, such as in abuse of voting rights and conflict of interests, apply to any company, including those with diffused control.

 

In addition, the rules of the Novo Mercado acknowledge that diffused control can involve a specific controlling shareholder, which is the one who actually exercises it. The rules of the Novo Mercado also acknowledge the specific liability of a certain shareholder or group of shareholders for misconduct.

 

According to the definition of diffused control, certain obligations and responsibilities apply to certain groups of shareholders who are not necessarily identified as controlling shareholders, such as the obligation to conduct a tender offer if such group of shareholders votes for delisting from the Novo Mercado or if delisting occurs due to non-compliance with the obligations of the Novo Mercado listing segment regulations. Therefore, if our control becomes diffused, all shareholders will be subject to the liability rules set forth in the Brazilian corporate law. However, some specific rules and liabilities set forth in the Novo Mercado listing segment regulations only apply for those shareholders who have the power to control our business, even though not formally identified as controlling shareholders.

  

Protection against Shareholder Concentration

 

Our by-laws contain a provision intended to avoid concentration of our shares in the hands of a small group of investors. This provision requires that any shareholder who becomes an owner of our common shares, or certain other rights, in an amount greater than or equal to 20% of our total capital stock (excluding any involuntary ownership interest additions arising from the cancellation of treasury shares or capital decrease resulting from the cancellation of shares), within 60 days from the date of acquisition, is required to publicly tender for all of our capital stock. Cresud, including the entities controlled by it or under its common control and their legal successors (but excluding any acquirer of shares from Cresud and its successors) are not covered under this obligation, which applies only to investors who acquired our shares after our listing in the Novo Mercado segment of B3 as of April 2006.

 

The percentage of 20% is not applicable to a person who becomes the holder of our shares in a number greater than 20% of the total shares as a result of (i) legal succession, provided that the shareholder sells the exceeding shares no later than 60 days as from the material event; (ii) merger of another company into our company; (iii) merger of shares of another company into our company; or (iv) subscription of shares, conducted in a primary offering, approved at the shareholders meeting, called by our board of directors, which proposal for capital increase has determined the share price based on the economic value calculated according to an economic and financial appraisal report conducted by a specialized company with renowned experience in publicly held companies.

 

Shareholders that acquire 20% of our common shares are obligated under this provision to: (i) make a tender offer to acquire the entirety our outstanding issued shares; (ii) ensure that the tender offer is conducted in an auction held at the B3 (iii) offer to pay a price per share as described below, and (iv) offer to pay cash in exchange for the shares, in reais.

 

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The tender offer price per share issued, provided that CVM regulations do not require the adoption of calculation criteria that would lead to a greater acquisition price, in which case, such CVM criteria would prevail, shall not be less than the higher amount among: (i) the market value of our share established in an expert valuation report prepared and approved by shareholders in accordance with our bylaws; (ii) 150% of the share price established in the most recent capital increase made through public offering within the 24-month period preceding the date on which the tender offer becomes mandatory, adjusted by the IPC-A index pro rata until actual payment; or (iii) 150% of the average listing price of our shares during the 90-day period preceding the tender offer on the stock exchange where they are mostly traded.

 

Launch of such a tender offer does not preclude other shareholders, or even us, from launching a competing tender offer in accordance with the applicable regulations.

 

In the event the acquiring shareholder fails to perform the obligations set forth in our bylaws, our board of directors shall call a special shareholders’ meeting to approve the suspension of the shareholder rights of such defaulting shareholder, without prejudice to losses and damages that may be claimed from it.

 

Any proposed amendment to limit our shareholders’ right to conduct a tender offer or to exclude it will impose on the shareholder(s) voting in favor of said amendment or exclusion at such shareholders’ meeting, the obligation of conducting such tender offer. Each shareholder shall have the right to one vote in any special shareholders’ meeting called to decide on amendments or elimination of such provisions of our bylaws.

 

Suspension of Rights of Acquiring Shareholders for Violation of Our bylaws

 

In the event an acquiring shareholder violates the provisions of our by-laws regarding the need to conduct a public tender offer in the event of a change of our control or the acquisition of shares representing 15% or more of our common shares, the rights of such acquiring shareholder will be suspended pursuant to a resolution passed at our shareholders’ meeting, which must be convened in the event of such noncompliance. The acquiring shareholder will not be entitled to vote at such meeting.

 

Public Meeting with Analysts

 

Pursuant to Novo Mercado regulations, at least once a year we must hold a public meeting with analysts and any other interested parties to disclose information regarding our projects and forecasts, as well as our economic and financial situation.

 

Annual Calendar

 

Pursuant to the Novo Mercado regulations, we must, by the end of January of each year, publicly disclose and send to the B3 an annual calendar with a schedule of our corporate events. Any subsequent modification to such schedule must be immediately and publicly disclosed and sent to the B3.

 

Duty to Disclose Related Party Transactions

 

Pursuant to the Novo Mercado regulations, we must publicly disclose and send to the B3 information about any contract between us and our related parties or managers of our related parties, whenever the amount of such contract in any one-year period reaches the greater of R$0.2 million or 1% of our shareholders’ equity.

 

The disclosure must specify the contract’s object, term, amount, termination conditions and impact, if any, on our business and management. Additionally, pursuant to CVM rules, in the event a related party has interest in the approval of any matter by our shareholders at a shareholders’ meeting, we must inform our shareholders of at least: the name and qualifications of the related party; the relationship between us and the related party; the amount of our common shares and other securities, directly or indirectly, held by the related party; all credits and amounts outstanding between us and the related party; a description of the transaction submitted to shareholders’ meeting approval; management’s recommendation in relation to the proposed related party transaction, indicating our advantages and disadvantages; and, in the event of an intercompany transaction, an affirmation by our management that the transaction was conducted at an arms-length basis or that the compensation is appropriate, and analysis of the related party transaction’s terms and conditions in relation to the terms and conditions of similar transactions entered into by third parties. See “Item 7—Major Shareholders and Related Party Transactions.”

 

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Description of Outstanding Warrants

 

On March 15, 2006, our board of directors approved the issuance to our founding shareholders of two series of warrants to acquire our common shares. The first series of such warrants, or “First Series Warrants,” consists of 256,000 warrants, and the second series, or the “Second Series Warrants,” consists of an additional 256,000 warrants. Such warrants were delivered to our founding shareholders in proportion to their respective interests in our capital stock on the date such warrants were issued. The First Series Warrants grant their holders the right to acquire such number of our common shares as will represent 20% of our total capital stock on the date such warrants are exercised, and the Second Series Warrants grant their holders the right to acquire such number of our common shares as will represent an additional 20% of our total capital stock on the date such warrants are exercised. We believe that these warrants are an incentive and contribute to ensure our founding shareholders’ commitment towards the development of our activities and the implementation of the business plan prepared by them.

 

First Series Warrants

 

The First Series Warrants will grant their holders the right to acquire our common shares at an exercise price of R$1,000 per share which was the issue price per share in our 2006 initial public offering, subject to the price adjustment described below.

 

We believe that the First Series Warrants represent an efficient mechanism of compensating our founding shareholders as those securities will only represent an economic gain in a scenario of a rising share price for our shares. The remuneration provided by the First Series Warrants will not interfere with our results or financial condition as a gain to our founding shareholders will be generated by market conditions. The principal terms of the First Series Warrants are as follows:

 

Series and Right to Acquire Common Shares

 

The First Series Warrants were issued in three sub-series, which differ in relation to the date on which their respective rights to acquire shares becomes effective. All three sub-series of the First Series Warrants are currently exercisable and tradable. The First Series Warrants expire on the date 15 years after the publication in Brazil of the notice of completion of our initial public offering (Anúncio de Encerramento), which notice was published on May 15, 2006.

 

Warrant Shares

 

Each lot of 1,000 warrants of the First Series Warrants originally entitled its respective holder to acquire one of our common shares, subject to the adjustments described in “Item 10—Additional Information—Adjustment of the Number of Common Shares for Subscription” below.

 

Adjustment of the Number of Common Shares for Subscription

 

If we issue shares that do not result from the exercise of the rights conferred under the warrants, the number of shares to which the warrants grant rights will be adjusted. Such increase in the number of shares that may be acquired by the holders of the warrants shall be proportional to such number of shares newly issued by us in relation to the number of shares existing before such issuance. Accordingly, holders of warrants whose rights had not yet been exercised shall be entitled to maintain the right to subscribe the same percentage interest in our capital stock as they were entitled to prior to such new issuance. The number of shares granted upon the exercise of the warrants will also be adjusted in order to reflect capital reductions, stock splits, reverse stock splits and share bonuses transactions, if any. Such adjustments will also apply to the issue of new warrants, debentures or other securities convertible into our common shares.

 

Exercise Price

 

The exercise price of the First Series Warrants was originally equivalent to the issue price per share in our 2006 initial public offering, i.e., R$1,000.00 (a thousand reais) per share. However, such exercise price is subject to certain adjustments and restatements as set forth at our board of directors meeting held on March 15, 2006.

 

If new shares that do not result from the exercise of our warrants are issued, the exercise price of the warrants shall be adjusted to reflect the price per share of such subsequent offerings. Such calculation will be made based on: (i) the total amount in reais of our capital stock after our 2006 initial public offering, excluding amounts relating to retained profits converted into equity, plus (ii) the total proceeds in reais received by us from any subsequent issuance of shares after our 2006 initial public offering that do not result from any exercise of our warrants, divided by (iii) the total number of shares outstanding after our 2006 initial public offering in addition to the shares issued thereafter, not including any shares issued as a result of any exercise of our warrants. The exercise price resulting from the application of such rules is also subject to the adjustment procedures set forth in the following paragraph.

 

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Exercise Price Adjustment

 

For purposes of adjustment of the exercise price of the First Series Warrants, the amounts set forth in items (1) and (2) in the paragraph above shall be adjusted, respectively, from (a) the date of the announcement of commencement of our 2006 initial public offering and (b) the date of each new issuance of shares made by us that does not result from any exercise of our warrants, based on the Compounded Consumer Price Index (IPC-A), during the period, if such periods are equal to or longer than 12 months. On June 30, 2020, the exercise price of the First Series Warrants was R$20.66 per share.

 

Exercise of Rights

 

The First Series Warrants may be exercised by their holders upon at least five business day advance notice to us.

 

Characteristics of the Common Shares for Subscription

 

The shares to be acquired pursuant to the First Series Warrants will be entitled to the same rights granted to other shares.

 

Holders of First Series Warrants

 

As of September 30, 2020, the holders of our First Series Warrants were:

 

Holder  Number   % 
Agro Managers   4,364    1.70 
Cape Town LLC   64,000    25.00 
Cresud   177,004    69.14 
Others   10,632    4.15 
Total   256,000    100 

  

Second Series Warrants

 

The Second Series Warrants grant their holders the right to acquire our common shares only in the event of (i) a transfer of control in accordance with our bylaws, the Novo Mercado listing regulations and CVM rules, (ii) the acquisition of a significant interest in our capital stock in accordance with our bylaws, or (iii) a mandatory tender offer in accordance with CVM regulations. In any of these events, a tender offer for the acquisition of all of our shares must be made. The exercise price for the shares underlying the Second Series Warrants will be equal to the price established in such tender offer.

 

The purpose of creating the Second Series Warrants was to provide our founding shareholders with a mechanism that would allow them under certain circumstances to maintain their interest in our capital stock. The principal terms of the Second Series Warrants are described below.

 

Series and Right to Acquire Common Shares

 

The Second Series Warrants were issued on March 15, 2006. The Second Series Warrants expire on the date 15 years after the publication in Brazil of the notice of completion of our initial public offering (Anúncio de Encerramento), which notice was published on May 15, 2006. The Second Series Warrants may be exercised by their holders only under the following circumstances:

 

Transfer of control: In the event of a transfer of control of our company, as prescribed by articles 41, 42 and 43 of our by-laws, the Novo Mercado listing regulations and CVM rules, provided that the resulting business or business group has no direct participation of our founding shareholders or persons related to them. The Second Series Warrants in this case must be exercised within ten business days of the publication of the tender offer made in connection with such transfer of control.

 

Acquisition of significant interest: In the event of an acquisition by any shareholder, individually or jointly with other shareholders, of an interest in our company representing an amount equal to or greater than 20% of our capital stock, as prescribed by article 44 of our by-laws, provided that the resulting business or business group has no direct participation of our founding shareholders or persons related to them. The Second Series Warrants in this case must be exercised within ten business days of the publication of the tender offer made in connection with such acquisition of a significant interest.

 

Mandatory tender offer in accordance with CVM rules: In the event a mandatory tender offer is made for our shares under CVM regulations, provided that the resulting business or business group has no direct participation of our founding shareholders or persons related to them. The Second Series Warrants in this case must be exercised within ten business days of the publication of such mandatory tender offer.

 

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Transferability

 

The Second Series Warrants may be transferred only among our founding shareholders, their controlling shareholder or their affiliates.

 

Warrant Shares

 

Each lot of 1,000 warrants of the Second Series Warrants originally entitled its respective holder to acquire one of our common shares, subject to the adjustments described in “Item 10—Additional Information—Adjustment of the Number of Common Shares for Subscription” below.

 

Adjustment of the Number of Common Shares for Subscription

 

If we issue shares that do not result from the exercise of the rights conferred under the warrants, the number of shares to be issued upon exercise of the warrants will be adjusted. Such increase in the number of shares that may be subscribed by the holders of the warrants shall be proportional to such number of shares newly issued by us in relation to the number of shares existing before such issuance. Accordingly, holders of warrants whose preemptive rights had not yet been exercised shall be entitled to maintain the right to subscribe the same percentage interest in our capital stock as they were entitled to prior to such new issuance. The number of shares granted upon the exercise of the warrants will also be adjusted in order to reflect capital reductions, stock splits, reverse stock splits and share bonuses transactions, if any. Such adjustments will also apply to the issue of new warrants, debentures or other securities convertible into our common shares.

 

Exercise Price

 

The exercise price of the Second Series Warrants will be equal to the tender offer prices described above under “—Second Series Warrants.”

 

Exercise of Rights

 

The right conferred by the Second Series Warrants may be exercised by their holders by sending notice to us within ten business days from the date of the public announcement of the applicable tender offer. The Second Series Warrants may be exercised only if our founding shareholders continue to own in the aggregate at least 80% of the number of shares held by them immediately after consummation of our 2006 initial public offering. On the date hereof, our founding shareholders own 100% of the number of shares they held immediately after the consummation of our 2006 initial public offering.

 

Characteristics of the Common Shares for Subscription

 

The shares to be acquired under the Second Series Warrants will be entitled to the same rights granted to our other shares.

 

Holders of Second Series Warrants

 

As of September 30, 2020, the holders of our Second Series Warrants were:

 

Holder  Number   % 
Agro Managers   4,364    1.70 
Cape Town LLC   64,000    25.00 
Cresud   177,004    69.14 
Others   10,632    4.15 
Total   256,000    100 

 

Adjustment in the Event of a Corporate Restructuring

 

In the event of any corporate restructuring or similar action, apart from such events mentioned above and which may have an impact on or represent a reduction of the rights of the holders of the First Series Warrants or the Second Series Warrants, it is stipulated in the meeting of our board of directors held on March 15, 2006 that we shall use our best efforts to negotiate with the holders of the First Series Warrants and Second Series Warrants, as appropriate, to set forth new exercise conditions, seeking to preserve the rights originally granted to the holders of such warrants, their economic and corporate value, the amount of underlying shares and their exercise price. For the purpose of such negotiation, decisions by the holders of the warrants shall be determined through a majority vote, and the holders of the First Series Warrants and the Second Series Warrants shall negotiate and vote separately. Any disputes will be submitted to the Arbitration Chamber of the B3 (Câmara de Arbitragem do Mercado) pursuant to our bylaws.

 

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C. Material Contracts

 

See “Item 4—Information on the Company—Business Overview—Material Agreements.”

 

D. Exchange Controls

 

There are no restrictions on ownership or voting of our capital stock by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments, interest on shareholders’ equity payments and proceeds from the sale of our capital stock into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation and foreign exchange regulations, which generally require, among other things, the registration of the relevant investment with the Central Bank and the CVM.

 

Investments in our common shares by (i) a holder not deemed to be domiciled in Brazil for Brazilian tax purposes, (ii) a non-Brazilian holder who is registered with the CVM under Resolution No. 4,373, or (iii) the depositary, are eligible for registration with the Central Bank. This registration (the amount so registered is referred to as registered capital) allows the remittance outside Brazil of foreign currency, converted at the commercial market rate, acquired with the proceeds of distributions on, and amounts realized through, dispositions of our common shares. The registered capital per common share purchased in the form of an American Depositary Security, or ADS, or purchased in Brazil and deposited with the depositary in exchange for an ADS, will be equal to its purchase price (stated in U.S. dollars). The registered capital per common share withdrawn upon cancellation of a Common ADS will be the U.S. dollar equivalent of (1) the average price of a common share on the B3 on the day of withdrawal, or (2) if no common shares were traded on that day, the average price on the B3 in the 15 trading sessions immediately preceding such withdrawal. The U.S. dollar equivalent will be determined on the basis of the average commercial market rates quoted by the Central Bank on the relevant dates.

 

Annex V Regulations

 

Resolution No. 1,927 of the National Monetary Council, as amended, provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. It restates and amends Annex V to Resolution No. 1,289 of the National Monetary Council, known as the Annex V Regulations. The ADS program was approved under the Annex V Regulations by the Central Bank and the CVM prior to the issuance of the ADSs.

 

Accordingly, the proceeds from the sale of ADSs by ADR holders outside Brazil are not subject to Brazilian foreign investment controls, and holders of the ADSs who are not resident in a Tax Haven Jurisdiction are entitled to favorable tax treatment. See “Item 10—Additional Information—Taxation— Brazilian Tax Considerations.”

 

We pay dividends and other cash distributions with respect to our common shares in reais. We have obtained an electronic certificate of foreign capital registration from the Central Bank in the name of the depositary with respect to our ADSs to be maintained by the custodian on behalf of the depositary. Pursuant to this registration, the custodian is able to convert dividends and other distributions with respect to our common shares represented by ADSs into foreign currency and remit the proceeds outside Brazil to the depositary so that the depositary may distribute these proceeds to the holders of record of the ADSs.

 

Investors residing outside Brazil may register their investments in our shares as foreign portfolio investments under Resolution No. 4,373 (described below) or as foreign direct investments under Law No. 4,131 (described below). Registration under Resolution No. 4,373 or Law No. 4,131 generally enables non-Brazilian investors to convert dividends, other distributions and sales proceeds received in connection with registered investments into foreign currency and to remit such amounts outside Brazil. Registration under Resolution No. 4,373 affords favorable tax treatment to non-Brazilian portfolio investors who are not resident in a Tax Haven Jurisdiction. See “Item 10—Additional Information—Taxation—Brazilian Tax Considerations.”

 

In the event that a holder of ADSs exchanges those ADSs for the underlying common shares, the holder must:

 

  ● sell those shares on the B3 and rely on the depositary’s electronic registration for five business days from the date of exchange to obtain and remit U.S. dollars outside Brazil upon the holder’s sale of our common shares;

 

  ● convert its investment in those shares into a foreign portfolio investment under Resolution No. 4,373; or

  

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  ● convert its investment in those shares into a direct foreign investment under Law No. 4,131.

 

The custodian is authorized to update the depositary’s electronic registration to reflect conversions of ADSs into foreign portfolio investments under Resolution No. 4,373.

 

If a holder of ADSs elects to convert its ADSs into a foreign direct investment under Law No. 4,131, the conversion will be effected by the Central Bank after receipt of an electronic request from the custodian with details of the transaction. If a foreign direct investor under Law No. 4,131 elects to deposit its common shares into the relevant ADR program in exchange for ADSs, such holder will be required to present to the custodian evidence of payment of capital gains taxes. The conversion will be effected by the Central Bank after receipt of an electronic request from the custodian with details of the transaction. See “Item 10—Additional Information—Taxation—Brazilian Tax Considerations” for details of the tax consequences to an investor residing outside Brazil of investing in our common shares in Brazil.

 

If a holder of ADSs wishes to convert its investment in our shares into either a foreign portfolio investment under Resolution No. 4,373 or a foreign direct investment under Law No. 4,131, it should begin the process of obtaining its own foreign investor registration with the Central Bank or with the CVM, as the case may be, in advance of exchanging the ADSs for the underlying common shares. A non-Brazilian holder of common shares may experience delays in obtaining a foreign investor registration, which may delay remittances outside Brazil, which may in turn adversely affect the amount, in U.S. dollars, received by the non-Brazilian holder.

 

Unless the holder has registered its investment with the Central Bank, the holder may not be able to convert the proceeds from the disposition of, or distributions with respect to, such common shares into foreign currency or remit those proceeds outside Brazil. In addition, if the non-Brazilian investor resides in a Tax Haven Jurisdiction or is not an investor registered under Resolution No. 4,373, the investor will be subject to less favorable tax treatment than a holder of ADSs. See “Item 10—Additional Information—Taxation—Brazilian Tax Considerations.”

 

Resolution 4,373

 

On September 29, 2014, the CMN issued Resolution No. 4,373, which provides for the new mechanism for non-resident investments in the Brazilian financial and capital markets. Resolution No. 4,373 became effective on March 30, 2015. Resolution No. 4,373 was the prior mechanism for that and its provisions were significantly the same as the ones described below.

 

All investments made by a non-Brazilian investor under Resolution No. 4,373 are subject to an electronic registration with the Central Bank. This registration permits non-Brazilian investors to convert dividend payments, interest on shareholders’ equity payments and proceeds from the sale of our share capital into foreign currency and to remit such amounts outside Brazil.

 

Under Resolution No. 4,373, non-Brazilian investors registered with the CVM may invest in almost all financial assets and engage in almost all transactions available to Brazilian investors in the Brazilian financial and capital markets without obtaining a separate Central Bank registration for each transaction, provided that certain requirements are fulfilled. Under Resolution No. 4,373, the definition of a non-Brazilian investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered outside Brazil.

 

Pursuant to Resolution No. 4,373, non-Brazilian investors must:

 

  ● appoint at least one representative in Brazil with powers to take action relating to its investments;

 

  ● appoint an authorized custodian in Brazil for its investments, which must be a financial institution duly authorized by the Central Bank and CVM;

 

  ● complete the appropriate foreign investor registration forms;

 

  ● register as a non-Brazilian investor with the CVM;

 

  ● register its investments with the Central Bank; and

 

  ● obtain a taxpayer identification number from the Brazilian federal tax authorities.

 

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The securities and other financial assets held by a non-Brazilian investor pursuant to Resolution No. 4,373 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM or be registered in registration, clearing and custody systems authorized by the Central Bank or by the CVM. In addition, the trading of securities held under Resolution No. 4,373 is restricted to transactions carried out on stock exchanges or through organized over-the-counter markets licensed by the CVM.

 

The offshore transfer or assignment of the securities or other financial assets held by non-Brazilian investors pursuant to Resolution No. 4,373 are prohibited, except for transfers resulting from a corporate reorganization effected abroad by a non-Brazilian investor, or occurring upon the death of an investor by operation of law or will.

 

Law 4,131

 

To obtain a certificate of foreign capital registration from the Central Bank under Law No. 4,131, a foreign direct investor must:

 

  ● register as a foreign direct investor with the Central Bank;

 

  ● obtain a taxpayer identification number from the Brazilian tax authorities;

 

  ● appoint a tax representative in Brazil; and

 

  ● appoint a representative in Brazil for service of process in respect of suits based on the Brazilian corporate law.

  

Foreign direct investors under Law No. 4,131 may sell their shares in either private or open market transactions, but these investors will generally be subject to less favorable tax treatment on gains with respect to our common shares. See “Item 10—Additional Information— Taxation—Brazilian Tax Considerations.”

  

E. Taxation

 

The following discussion contains a description of the material Brazilian and U.S. federal income tax consequences of the acquisition, ownership and disposition of our common shares or ADSs. The following discussion does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase, hold or dispose of our common shares or ADSs. This discussion is based upon the tax laws of Brazil and the United States and regulations under these tax laws as currently in effect, which are subject to change.

 

Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of our common shares or ADSs.

 

Prospective purchasers of our common shares or ADSs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of our common shares or ADSs in their particular circumstances.

 

Brazilian Tax Considerations

 

The following discussion contains a description of the material Brazilian tax consequences, subject to the limitations set forth herein, of the acquisition, ownership and disposition of our common shares or ADSs by a holder not deemed to be domiciled in Brazil for purposes of Brazilian taxation, or a Non-Resident Holder. This discussion is based on the tax laws of Brazil and regulations thereunder in effect on the date hereof, which are subject to change (possibly with retroactive effect). This discussion does not specifically address all of the Brazilian tax considerations that may be applicable to any particular Non-Resident Holder. Therefore, each Non-Resident Holder should consult its own tax advisor about the Brazilian tax consequences of an investment in our common shares or ADSs.

 

Individuals domiciled in Brazil and Brazilian companies are taxed in Brazil on the basis of their worldwide income which includes earnings of Brazilian companies’ foreign subsidiaries, branches and affiliates. The earnings of branches of foreign companies and non-Brazilian residents, or nonresidents, in general are taxed in Brazil only on income derived from Brazilian sources.

 

Dividends

 

Dividends paid by a Brazilian corporation, such as us, including stock dividends and other dividends paid to a Non-Resident Holder of our common shares or ADSs, are currently not subject to income tax withholding in Brazil to the extent that such amounts are related to profits generated after January 1, 1996. Dividends paid from profits generated before January 1, 1996 may be subject to Brazilian income tax withholding at varying rates, according to the tax legislation applicable to each corresponding year.

 

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On September 16, 2013, Brazilian tax authorities issued Normative Ruling 1,397/13, which, among other things, established rules regarding the withholding tax exemption on dividend distributions. According to Normative Ruling 1,397/13, the withholding tax exemption on dividend income would only be applicable to dividends distributed out of profits determined in accordance with Brazilian accounting rules that were effective until December 31, 2007 (old Brazilian GAAP). In this sense, if (i) taxpayers make dividend distributions based on new Brazilian accounting rules already conforming to IFRS principles, and (ii) such distributions are made in excess of the dividends that could have been distributed had the profits been determined in accordance with Brazilian accounting rules that were effective until December 31, 2007, the “excess distribution” would be deemed as taxable income in the hands of the beneficiary and subject to withholding income tax at the rate of 15% or 25%.

 

With the enactment of Law 12,973/14, this taxation has been eliminated, since this law determined the exemption of Income Tax on the excess distribution of dividends provided that these have been assessed from 2008 to 2013 and from 2015 onwards. The risk for the dividends paid in excess remains only with respect to profit accrued in 2014 for legal entities that have not opted for the advance of effects of Law 12,973/14 for 2014, due to the provisions of RFB Regulatory Instruction 1,492/14.

 

Interest on Shareholders’ Equity

 

Law No. 9,249, of December 26, 1995, as amended, allows a Brazilian corporation, such as us, to make distributions to shareholders of interest on shareholders’ equity, and treat those payments as a deductible expense for purposes of calculating Brazilian corporate income tax, and, since 1997, social contribution tax on net profit as well, as long as the limits described below are observed. These distributions may be paid in cash. For tax purposes, the deductible amount of this interest is limited to the daily pro rata variation of the TJLP, as determined by the Central Bank from time to time, and the amount of the deduction may not exceed the greater of:

 

  ● 50% of net income (after the deduction of social contribution tax on net profit but before taking into account the provision for corporate income tax and the amounts attributable to shareholders as interest on shareholders’ equity) for the period in respect of which the payment is made; and

 

  ● 50% of the sum of retained profits and income reserves as of the date of the beginning of the period in respect of which the payment is made.

 

Payment of interest on shareholders’ equity to a Non-Resident Holder is subject to withholding income tax at the rate of 15%, or 25% if the Non-Resident Holder is domiciled in (i) a country or location that does not impose income tax, or (ii) where the maximum income tax rate is lower than 20.0%, or (iii) a Tax Haven Jurisdiction. See “Interpretation of the Discussion of the Definition of “Tax Haven Jurisdictions” below.

 

These payments of interest on shareholders’ equity to a Non-Resident Holder may be included, at their net value, as part of any mandatory dividend. To the extent payment of interest on shareholders’ equity is so included, we are required to distribute to shareholders an additional amount to ensure that the net amount received by them, after payment of the applicable income tax withholding, plus the amount of declared dividends, is at least equal to the mandatory dividend.

 

Payments of interest on shareholders’ equity are decided by our shareholders, at our annual shareholders meeting, on the basis of recommendations of our board of directors. No assurance can be given that our board of directors will not recommend that future distributions of profits should be made by means of interest on shareholders’ equity instead of by means of dividends.

 

Taxation of Gains

 

Under Law No. 10,833/2003, the gain on the disposition or sale of assets located in Brazil by a Non-Resident Holder, whether to another non-Brazilian resident or to a Brazilian resident, may be subject to income tax withholding in Brazil.

 

With respect to the disposition of our common shares, as they are assets located in Brazil, the Non-Resident Holder should be subject to income tax on the gains assessed, following the rules described below, regardless of whether the transactions are conducted in Brazil or with a Brazilian resident.

 

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With respect to our ADSs, although the matter is not entirely clear, arguably the gains realized by a Non-Resident Holder upon the disposition of ADSs to another non-Brazilian resident will not be taxed in Brazil, on the basis that ADSs are not “assets located in Brazil” for the purposes of Law No. 10,833/2003. We cannot assure you, however, that the Brazilian tax authorities or the Brazilian courts will agree with this interpretation. As a result, gains on a disposition of ADSs by a Non-Resident Holder to a Brazilian resident, or even to a non-Brazilian resident, in the event that courts determine that ADSs would constitute assets located in Brazil, may be subject to income tax in Brazil according to the rules applicable to our common shares, described below.

 

As a general rule, gains realized as a result of a disposition of our common shares or ADSs are the positive difference between the amount realized on the transaction and the acquisition cost of our common shares or ADSs.

 

Under Brazilian law, however, income tax rules on such gains can vary depending on the domicile of the Non-Resident Holder, the type of registration of the investment by the Non-Resident Holder with the Central Bank and how the disposition is carried out, as described below.

 

Gains realized on a disposition of shares carried out on a Brazilian stock exchange (which includes the organized over-the-counter market) are:

 

  ● exempt from income tax when realized by a Non-Resident Holder that (1) has registered its investment in Brazil with the Central Bank under the rules of Resolution 4,373 (a “4,373 Holder”), and (2) is not a resident in a country or location which is defined as a Tax Haven Jurisdiction for those purposes; or

 

  ● subject to income tax at a rate of 15% in the case of gains realized by (A) a Non-Resident Holder that (1) is not a 4,373 Holder and (2) is not a Tax Haven Jurisdiction resident; or by (B) a Non-Resident Holder that (1) is a 4,373 Holder, and (2) is a Tax Haven Jurisdiction resident. In this case, a withholding income tax of 0.005% shall be applicable and withheld by the intermediary institution (i.e. a broker) that receives the order directly from the Non-Resident Holder, which can be later offset against any income tax due on the capital gain earned by the Non-Resident Holder; and

 

  ● subject to income tax at a rate of up to 25% in any other case, including a case of gains assessed by a Non-Resident Holder that is not a 4,373 Holder, and is a Tax Haven Jurisdiction resident for this purpose (as described below). In these cases, a withholding income tax of 0.005% of the sale value will be applicable and can be later offset with the eventual income tax due on the capital gain.

 

In the case of redemption of securities or capital reduction by a Brazilian corporation, such as us, the positive difference between the amount effectively received by the Non-Resident Holder and the corresponding acquisition cost is treated, for tax purposes, as capital gain derived from sale or exchange of shares not carried out on a Brazilian stock exchange market, and is therefore subject to income tax at the rate of 15% or 25%, as the case may be.

 

The deposit of our common shares in exchange for ADSs will be subject to Brazilian income tax if the acquisition cost of the shares is lower than (1) the average price per share on a Brazilian stock exchange on which the greatest number of such shares were sold on the day of deposit, or (2) if no shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of shares were sold in the 15 trading sessions immediately preceding such deposit. In such case, the difference between the acquisition cost and the average price of the shares calculated as above will be considered to be a capital gain subject to income tax withholding at the rate of 15% or 25%, as the case may be. In some circumstances, there may be arguments to claim that this taxation is not applicable in the case of a Non-Resident Holder that is a 4,373 Holder and is not a resident in a Tax Haven Jurisdiction for this purpose. The availability of these arguments to any specific holder of our common shares will depend on the circumstances of such holder. Prospective holders of our common shares should consult their own tax advisors as to the tax consequences of the deposit of our common shares in exchange for ADSs.

 

Any exercise of preemptive rights relating to our common shares or ADSs will not be subject to Brazilian taxation. Any gain on the sale or assignment of preemptive rights relating to our common shares, including the sale or assignment carried out by the depositary, on behalf of Non-Resident Holders of ADSs, will be subject to Brazilian income taxation according to the same rules applicable to the sale or disposition of our common shares.

 

Interpretation of the Discussion of the Definition of “Tax Haven Jurisdictions”

 

On November 28, 2014 Brazilian tax authorities enacted Normative Instruction No. 488 listing (i) the countries and jurisdictions considered Tax Haven Jurisdictions (countries and jurisdictions that do not tax income or tax it at a rate below 17% or where the local legislation does not allow access to information related to the shareholding composition of legal entities or to their ownership or to the identity of the effective beneficiary of the income attributed to non-residents), and (ii) the privileged tax regimes, which definition is provided by Law No. 11,727, of June 23, 2008. Although we believe that the best interpretation of the current tax legislation could lead to the conclusion that the above mentioned “privileged tax regime” concept should apply solely for purposes of Brazilian transfer pricing and thin capitalization rules, we cannot assure you whether subsequent legislation or interpretations by the Brazilian tax authorities regarding the definition of a “privileged tax regime” provided by Law No. 11,727 will also apply to a Non-Resident Holder on payments potentially made by a Brazilian source.

  

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We recommend prospective investors to consult their own tax advisors from time to time to verify any possible tax consequences arising of Normative Instruction No. 1,037 and Law No. 11,727. If the Brazilian tax authorities determine that the concept of “privileged tax regime” provided by Law No. 11,727 will also apply to a Non-Resident Holder on payments potentially made by a Brazilian source the withholding income tax applicable to such payments could be assessed at a rate up to 25%.

 

Tax on Foreign Exchange Transactions (IOF/Exchange Tax)

 

Brazilian law imposes the IOF/Exchange Tax on the conversion of reais into foreign currency and on the conversion of foreign currency into reais. Foreign exchange agreements entered into as from October 7, 2014 in connection with inflows of funds related to investments carried out by Non- Resident Holders in the Brazilian financial and capital markets are subject to the IOF/Exchange Tax at a zero percent rate. Foreign exchange transactions related to outflows of funds in connection with investments made in the Brazilian financial and capital markets are subject to IOF/Exchange Tax at a zero percent rate. This zero percent rate applies to payments of dividends and interest on shareholders’ equity to Non-Resident Holders with respect to investments in the Brazilian financial and capital markets. Other than these transactions, the rate applicable to most foreign exchange transactions is 0.38%. Other rates may apply to particular transactions and the Brazilian government may increase the rate at any time up to 25% on the foreign exchange transaction amount. However, any increase in rates is only authorized to apply to future transactions.

 

Tax on Transactions Involving Bonds and Securities (IOF/Securities Tax)

 

Brazilian law also imposes the IOF/Securities Tax due on transactions involving bonds and securities, including those carried out on a Brazilian stock exchange. The rate of the IOF/Securities Tax applicable to transactions involving our common shares is currently zero. However, the rate of the IOF/Securities Tax applicable to the transfer of our common shares with the specific purpose of enabling the issuance of ADSs is currently zero. This rate is applied on the product of (1) the number of shares which are transferred, multiplied by (2) the closing price for those shares on the date prior to the transfer or, if such closing price is not available on that date, the last available closing price for those shares. The Brazilian government may increase the rate of the IOF/Securities Tax at any time up to 1.5% per day of the transaction amount, but only in respect of transactions carried out after the increase in rate enters into force.

 

Other Brazilian Taxes

 

There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of our common shares or ADSs by a Non-Resident Holder except for gift and inheritance taxes levied by some states in Brazil. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable by Non-Resident Holders of our common shares or ADSs.

 

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U.S. Federal Income Tax Considerations

 

The following summary describes the material U.S. federal income tax consequences of the purchase, ownership, and disposition of our common shares and ADSs as of the date hereof. Except where noted, this discussion deals only with U.S. Holders (as defined below) that hold our common shares or ADSs as capital assets for U.S. federal income tax purposes (generally, property held for investment). This summary does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:

 

  ● a dealer in securities or currencies;

 

  ● a financial institution;

 

  ● a regulated investment company;

 

  ● a real estate investment trust;

 

  ● an insurance company;

 

  ● a tax-exempt organization;

 

  ● a person that received our common shares or ADSs as compensation for the performance of services;

 

  ● a person holding our common shares or ADSs as part of a hedging, integrated or conversion transaction or a straddle;

 

  ● a person deemed to sell common shares or ADSs under the constructive sale provisions of the Internal Revenue Code of 1986, as amended (the “Code”);

 

  ● a trader in securities that has elected the mark-to-market method of accounting for your securities;

 

  ● a person liable for alternative minimum tax;

 

  ● a person who owns or is deemed to own 10% or more of our stock (by vote or value);

 

  ● a partnership or other pass-through entity for U.S. federal income tax purposes;

 

  ● a person required to accelerate the recognition of any item of gross income with respect to our common shares or ADSs as a result of such income being recognized on an applicable financial statement; or

 

  ● a person whose “functional currency” is not the U.S. dollar.

 

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As used herein, “U.S. Holder” means a beneficial owner of our common shares or ADSs that is for U.S. federal income tax purposes:

 

  ● an individual citizen or resident of the United States;

 

  ● a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

  ● an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

 

  ● a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

 

The discussion below is based upon the provisions of the Code, and regulations, rulings and judicial decisions thereunder at the date hereof, and such authorities may be repealed, revoked or modified (possibly on a retroactive basis) so as to result in U.S. federal income tax consequences different from those discussed below. In addition, this summary is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.

 

If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds our common shares or ADSs, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our common shares or ADSs, you should consult your tax advisors.

 

This summary does not contain a detailed description of all the U.S. federal income tax consequences to you in light of your particular circumstances and does not address the Medicare tax on net investment income or the effects of any state, local or non-U.S. tax laws.

 

If you are considering the purchase, ownership or disposition of our common shares or ADSs, you should consult your own tax advisors concerning the U.S. federal income tax consequences to you in light of your particular situation as well as any consequences arising under other U.S. federal tax laws and the laws of any other tax jurisdiction.

 

ADSs

 

If you hold ADSs, for U.S. federal income tax purposes, you generally will be treated as the owner of the underlying common shares that are represented by such ADSs. Accordingly, deposits or withdrawals of our common shares for ADSs will not be subject to U.S. federal income tax.

 

Taxation of Distributions

 

Subject to the discussion under “—Passive Foreign Investment Company” below, distributions on our common shares or ADSs (including amounts withheld to reflect Brazilian withholding taxes and distributions of interest on shareholders’ equity, as described above under “—Brazilian Tax Considerations”) will be taxable as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such dividends (including withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of our common shares, or by the depositary, in the case of our ADSs. Such dividends, however, will not be eligible for the dividends received deduction allowed to corporations.

 

Under current law, dividends received by non-corporate U.S. shareholders of qualified foreign corporations will be subject to U.S. federal income tax at lower rates than other types of ordinary income if certain conditions are met. A foreign corporation generally is treated as a qualified foreign corporation with respect to dividends received from that corporation on shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. U.S. Treasury Department guidance indicates that our ADSs (which are listed on the NYSE), but not our common shares, are readily tradable on an established securities market in the United States. Thus, we do not believe that dividends that we pay on our common shares that are not represented by ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. Non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your tax advisors regarding the application of this legislation to your particular circumstances.

 

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Notwithstanding the foregoing, non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a passive foreign investment company (a “PFIC”) in the taxable year in which such dividends are paid or in the preceding taxable year (as discussed under “—Passive Foreign Investment Company” below).

 

The amount of any dividend paid in reais will equal the U.S. dollar value of the reais received, calculated by reference to the exchange rate in effect at the date the dividend is actually or constructively received by you, in the case of our common shares, or by the depositary, in the case of our ADSs, regardless of whether the reais are converted into U.S. dollars at that time. If the reais received as a dividend are not converted into U.S. dollars at the date of receipt, you will have a tax basis in reais equal to their U.S. dollar value at the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of reais will be treated as U.S. source ordinary income or loss.

 

Subject to certain conditions and limitations, Brazilian withholding taxes on dividends may be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on our common shares or ADSs will be treated as income from sources outside the United States and will generally constitute passive category income. Further, in certain circumstances, if you have held our common shares or ADSs for less than a specified minimum period during which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on our common shares or ADSs. If you do not elect to claim a U.S. foreign tax credit, you may instead claim a deduction for Brazilian income tax withheld, but only for a taxable year in which you elect to do so with respect to all foreign income taxes paid or accrued in such taxable year. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.

  

To the extent that the amount of any distribution (including amounts withheld to reflect Brazilian withholding taxes and distributions of interest on shareholders’ equity, as described above under “—Brazilian Tax Considerations”) exceeds our current and accumulated earnings and profits for a taxable year, as determined under U.S. federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of our common shares or ADSs, and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange (as discussed below under “—Taxation of Capital Gains”). However, we do not expect to keep earnings and profits in accordance with U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend (as discussed above).

 

Distributions of common shares or ADSs that are received as part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.

 

Passive Foreign Investment Company

 

In general, we will be a PFIC for any taxable year in which:

 

  ● at least 75% of our gross income is passive income, or

 

  ● at least 50% of the value (determined based on a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income.

 

For purposes of determining whether we are a PFIC, cash is a passive asset and passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). In addition, income from commodities transactions is generally considered passive unless such income is derived in the active conduct of a commodities business. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income.

 

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Based on the composition of our income and assets, including goodwill, we do not believe that we were classified as a PFIC for U.S. federal income tax purposes for our most recent taxable year. The rules in this regard are not entirely clear, however, and there can be no assurance that the Internal Revenue Service (“IRS”) will not successfully assert a contrary position. In addition, the determination of whether we are a PFIC is made annually. Accordingly, it is possible that our status as a PFIC may change in any future taxable year due to changes in our asset or income composition. Although the determination of whether we are a PFIC is made annually, if we are a PFIC for any taxable year in which you hold our common shares or ADSs, you will be subject to special tax rules discussed below for that year and for each subsequent year in which you hold the common shares or ADSs (even if we do not qualify as a PFIC in such subsequent years). However, if we cease to be a PFIC, you can avoid the continuing impact of the PFIC rules by making a special election (a “Purging Election”) to recognize gain in the manner described below as if your common shares or ADSs had been sold on the last day of the last taxable year during which we were a PFIC. In addition, a new holding period would be deemed to begin for your common shares or ADSs for purposes of the PFIC rules. After the Purging Election, your common shares or ADSs with respect to which the Purging Election was made will not be treated as shares in a PFIC unless we subsequently become a PFIC. You are urged to consult your own tax advisor about the availability of this election, and whether making the election would be advisable in your particular circumstances.

 

If we are a PFIC for any taxable year during which you hold our common shares or ADSs, and you do not make a mark-to-market election, as described below, you will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a pledge, of common shares or ADSs. Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or your holding period for the common shares or ADSs will be treated as excess distributions. Under these special tax rules:

 

  ● the excess distribution or gain will be allocated ratably over your holding period for the common shares or ADSs,

 

  ● the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and

 

  ● the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

 

You will also generally be required to file IRS Form 8621 if you hold our common shares or ADSs in any year in which we are classified as a PFIC.

 

If we are a PFIC for any taxable year during which you hold our common shares or ADSs and any of our non-U.S. subsidiaries is also a PFIC, you will be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.

 

In certain circumstances, in lieu of being subject to the rules discussed above with respect to excess distributions and recognized gains, you may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method, provided that such stock is regularly traded on a qualified exchange. Under current law, the mark-to-market election may be available to holders of ADSs because the ADSs are listed on the NYSE, which constitutes a qualified exchange, although there can be no assurance that the ADSs will be “regularly traded” for purposes of the mark-to-market election. It should also be noted that only our ADSs and not our common shares are listed on a qualified stock exchange in the United States. Our common shares are listed on the B3, which must meet certain trading, listing, financial disclosure and other requirements to be treated as a qualified exchange under applicable U.S. Treasury regulations for purposes of the mark-to-market election, and no assurance can be given that our common shares will be “regularly traded” for purposes of the mark-to-market election.

  

If you make an effective mark-to-market election, you will include in each year that we are a PFIC as ordinary income the excess of the fair market value of your common shares or ADSs at the end of the year over your adjusted tax basis in the common shares or ADSs. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the common shares or ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election, in each year that we are a PFIC any gain you recognize upon the sale or other disposition of your common shares or ADSs will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount of previously included income as a result of the mark-to-market election.

 

Your adjusted tax basis in the common shares or ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you make a mark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the common shares or ADSs are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election. You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances.

 

Alternatively, you can sometimes avoid the rules described above by electing to treat a PFIC as a “qualified electing fund” under Section 1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election.

 

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You are urged to consult your tax advisors concerning the U.S. federal income tax consequences of holding common shares or ADSs if we are considered a PFIC in any taxable year.

 

Taxation of Capital Gains

 

You generally will recognize taxable gain or loss upon the sale, exchange or other taxable disposition of our common shares or ADSs equal to the difference between the amount realized on the sale, exchange or other taxable disposition of such common shares or ADSs and your adjusted tax basis in such common shares or ADSs. Subject to the discussion under “—Passive Foreign Investment Company” above, such gain or loss will generally be capital gain or loss. Capital gains or losses will be long-term capital gain or loss if our common shares or ADSs have been held for more than one year. Certain non-corporate U.S. Holders (including individuals) may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. The deductibility of capital losses is subject to limitations under the Code.

 

If a Brazilian income tax is withheld on the sale or other disposition of our common shares or ADSs, your amount realized will include the gross amount of the proceeds of that sale or other disposition before deduction of the Brazilian income tax. Capital gain or loss, if any, realized by you on the sale, exchange or other taxable disposition of our common shares or ADSs generally will be treated as U.S. source gain or loss for U.S. foreign tax credit purposes. Consequently, in the case of gain from the disposition of common shares or ADSs that is subject to Brazilian income tax, you may not be able to benefit from the foreign tax credit for that Brazilian income tax (i.e., because the gain from the disposition would be U.S. source), unless you can apply the credit (subject to applicable limitations) against U.S. federal income tax payable on other income from foreign sources. Alternatively, you may take a deduction for the Brazilian income tax if you do not take a credit for any foreign taxes paid or accrued during the taxable year.

 

Other Brazilian Taxes

 

You should note that any Brazilian IOF/Exchange Tax or IOF/Securities Tax (as discussed above under “—Brazilian Tax Considerations”) generally will not be treated as a creditable foreign tax for U.S. federal income tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under the Code. You should consult your tax advisors regarding the U.S. federal income tax consequences of these taxes.

 

Information Reporting and Backup Withholding

 

In general, information reporting will apply to dividends (including distributions of interest on shareholders’ equity) in respect of our common shares or ADSs and the proceeds from the sale, exchange or other taxable disposition of our common shares or ADSs that are paid to you within the United States (and in certain cases, outside the United States), unless you establish that you are an exempt recipient, such as a corporation. A backup withholding tax may apply to such payments if you fail to provide your correct taxpayer identification number or certification of exempt status or fail to report in full dividend and interest income.

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is timely furnished to the IRS.

 

The above description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership or disposition of our common shares or ADSs. Each holder should consult such holder’s own tax advisor concerning the overall tax consequences to it, including the consequences under laws other than U.S. federal income tax laws, of an investment in our common shares or ADSs.

 

F. Dividends and Paying Agents

 

Not applicable.

 

G. Statement by Experts

 

Not applicable.

 

H. Documents on Display

 

We are subject to the reporting requirements of the Exchange Act, which requires that we file periodic reports and other information with the SEC. As a foreign private issuer, we file annual reports on Form 20-F as opposed to Form 10-K. We do not file quarterly reports on Form 10-Q but furnish reports on Form 6-K.

  

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Our reports and other information filed by us with the SEC are available on the SEC website at http://www.sec.gov and may also be inspected and copied by the public at the public reference facilities maintained by the SEC at Station Place, 100 F Street, N.E., Room 1580, Washington, D.C.

20549.

  

From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information regarding our company is routinely posted on and accessible at www.brasil-agro.com. Information on our website is not incorporated by reference in this annual report.

 

We furnish The Bank of New York, as the depositary of our ADSs, with annual reports in English, which include a review of operations and our audited consolidated financial statements prepared in accordance with IFRS, and our annual report on Form 20-F. Upon our request, the depositary will promptly mail such reports to all record holders of ADSs. We also furnish to the depositary, in English, all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. Upon our request, the depositary will make such notices, reports and communications available to holders of ADSs and will mail to all record holders of ADSs a notice containing a summary of the information contained in any notice of a shareholders’ meeting it receives.

 

As a foreign private issuer, we are exempt from the Exchange Act rules prescribing the furnishing and content of proxy statements. As a foreign private issuer, we are also exempt from the Exchange Act rules relating to short-swing profit disclosure and liability.

 

I. Subsidiary Information

 

Not applicable.

 

ITEM 11—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risks arising in the normal course of our business. Market risks are beyond our control and consist of the possibility that changes in interest rates, exchange rates, the market prices of our products and credit risks may adversely affect the value of our financial assets and liabilities or our future cash flows or earnings.

 

Raw Material Acquisition Risks

 

For the acquisition of farming inputs, our primary risks are foreign-exchange variations, the supply and demand of each input, farming commodity prices and freight prices. Our dependence on imported raw materials is also subject to supply and customs clearance delays. We are also subject to risks regarding the availability of the specific varieties of seeds we use, which are affected by weather conditions, among other factors.

 

In addition, the price of diesel fuel, which is the primary fuel used in farming machinery and trucks, is affected by the variation in oil prices as well as by the price-control policies adopted by the Brazilian government.

 

Foreign Exchange Risks

 

Certain of our income is linked to the exchange rate between the real and the U.S. dollar, and consequently our revenues are impacted by foreign exchange fluctuations. Certain of our commodities, such as soybean, may be priced in reais or in U.S. dollars. In addition, certain of the inputs necessary for farming production, such as chemicals, pesticides and fertilizers, may be priced in or based on the U.S. dollar. In order to reduce the impact on revenue, we seek to limit our foreign exchange exposure to 5% of our total expected revenue from commodities typically priced in U.S. dollars.

 

On June 30, 2020, we had a short position in U.S. dollars in the amount of US$38.0 million. The result of a hypothetical devaluation of 5% of the real in relation to the dollar would generate a loss before taxes of R$10.4 million.

 

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Interest Rate Risks

 

Exposure to interest rates subjects us and our subsidiaries to risks arising from the effect of interest rate fluctuations on our financial assets and liabilities. A portion of our indebtedness is subject to fixed rates of interest, while only our financings with BNDES are subject to variable rates indexed to the TJLP rate. We do not engage in hedging transactions with respect to such financings because we believe the interest rates charged thereon are lower than typical rates in the Brazilian market.

 

If our volume of funds invested in financial instruments indexed to the CDI rate remains the same with June 30, 2020 as a base date, a hypothetical decrease in the CDI rate of 10% would reduce our income by R$35.9 thousand monthly.

 

Farming Commodity Risks

 

A reduction in commodity prices would affect our margins and operating results. Commodity price variations are associated with global supply and demand, as well as climatic, technological, commercial and economic conditions and government policies. To reduce these risks to us from commodity price variations, we use financial instruments such as derivatives and over-the-counter instruments including options and futures contracts negotiated in the commodities market throughout the ordinary course of our crop cycles, from the purchase of inputs to crop planting up until harvest. We believe that the maintenance of our current hedging policy is necessary to minimize the risks related to commodity price variations.

 

On June 30, 2020, we had a short position in soybean derivatives (CBOT-futures, options and OTC contracts) in the total volume of 745,558 thousand bags.

 

Considering sales volumes hedged by derivatives and the soybean price as of June 30, 2020, we believe that a hypothetical decrease of 5% in the price of soybean not hedged by derivatives would decrease our expected revenues from grain sales for the next 12 months by R$7.5 million. 

 

Risk Management and Hedging Policies

 

We are exposed to risks derived from commodity price variations for such products as soybean, corn, sugarcane, rice and sorghum, as well as foreign-exchange variations. We hedge our exposure to commodity price risks for our transactions through over-the-counter instruments and maintain our exposures within pre-established limits. Such financial instruments include (i) commodity price and exchange rate swap contracts; (ii) currency contracts that provide a fixed exchange rate in reais for our dollar-denominated receivables and chargeables; (iii) commodity futures contracts for soybean, corn and ethanol that allow us to buy or sell commodities at predetermined prices; and (v) options contracts that allow us to acquire the right to buy or sell an asset at a preset price by a certain date. Since these transactions are normally made in U.S. dollars, we hedge our exposure to foreign-exchange risks by entering into contracts with fixed exchange rates. We have set our limit of foreign-exchange exposure to 5% of the total revenue expected from the sale of each commodity produced by us.

 

Our risk management policy seeks to protect our cash flows and expenditures, and thus we monitor the volatility and historical patterns of the primary market trends that affect our revenue and production costs, including (i) commodity prices, commonly determined in U.S. dollars; (ii) differences between domestic and international market prices of our commodities; (iii) exchange rates; and (iv) prices impacting our principal production costs, including, fertilizers, pesticides and chemicals.

 

In addition to monitoring these trends, our strategic planning department analyzes them in light of our exposures and positions in the market and prepares reports on a regular basis analyzing such risks in the light of simulations under various hypothetical situations indicating the effects on our results of different variations in market prices and conditions. Such analysis and reports include the monitoring and assessment of: (i) the status of the commercialization and delivery of our products; (ii) updates regarding our estimated planted area and production volumes; (iii) the distribution of sales by product and type (such as futures contracts, options, fixed term contracts); (iv) market analysis and historical comparisons of the prices, rates and other indices that affect our gross revenue; (v) risk analysis models and simulations such as the Monte Carlo simulation, that analyze the volatility and sensitivity of our assets and the correlations that exist among such assets; and (vi) stress test analyses under different scenarios. Such reports are then delivered to our risk management committee, which develops the goals and limits of our hedging strategy and our hedging policy, which is defined and approved by our board of directors. Our risk management committee then supervises our strategic planning department in the implementation and the execution of our hedging strategy.

 

ITEM 12— DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

A. Debt Securities

 

Not applicable.

 

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B. Warrants and Rights

 

Not applicable.

 

C. Other Securities

 

Not applicable.

 

 

D. American Depositary Shares

 

The following table sets forth the fees and expenses that a holder of ADRs may have to pay pursuant to our Amended and Restated Deposit Agreement, dated as of November 6, 2012 (the “Deposit Agreement”), with The Bank of New York Mellon, as depositary, in connection with our ADS program:

 

Fee and Reimbursement Provisions

 

Fee or Charge   Relating to
     
1.    Taxes and other governmental charges    
     
2.    Registration fees as may be in effect for the registration of transfers of common shares underlying the ADRs on the share register of our company or any Brazilian registrar   The transfer of common shares underlying ADRs to or from the name of the depositary or its nominee or Banco Itaú, S.A., as custodian for the depositary, or its nominee on the making of deposits or withdrawals under the Deposit Agreement
     
3.    Cable, telex and facsimile transmission expenses expressly provided under the Deposit Agreement    
     
4.    Expenses incurred by the depositary in the conversion of foreign currency   Amounts in reais received by way of dividends or other distributions or the net proceeds from the sale of securities, property or other rights in respect of ADRs
     
5.    U.S.$5.00 or less per 100 ADRs (or portion thereof)   The delivery of ADRs and the surrender of ADRs, or the distribution of securities or other property to holders of ADRs
     
6.    U.S.$0.02 or less per ADR (or portion thereof)   Any cash distribution made pursuant to the Deposit Agreement, except for distributions of cash dividends
     
7.    U.S.$0.02 or less per ADR (or portion thereof) per year, subject to prior consent by the Company   Depositary services
     
8.    Payment of any other charges payable by the depositary, any of the depositary’s agents, including the depositary’s custodian, or the agents of the depositary’s agents in connection with the servicing of shares underlying the American Depositary Shares or other deposited securities    

  

The fee and reimbursement provisions described in rows seven and eight of the table above may, at the depositary’s discretion, be billed to the holders of ADSs or deducted from one or more cash dividends or other cash distributions.

 

A form of the Deposit Agreement is filed as Exhibit 2.1 to this annual report. We encourage you to review this document carefully if you are a holder of ADSs.

 

Payment of Taxes

 

ADS holders are responsible for any taxes or other governmental charges payable on our ADSs or on the deposited securities represented by any of our ADSs. The depositary may refuse to register any transfer of our ADSs or allow the withdrawal of the deposited securities represented by our ADSs until such taxes or other charges are paid. It may apply payments owed to ADS holders or sell deposited securities represented by ADSs to pay any taxes owed and ADS holders will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders any proceeds, or send to ADS holders any property, remaining after it has paid the taxes.

 

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Part II

 

ITEM 13—DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

None.

 

ITEM 14—MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

None.

 

ITEM 15—CONTROLS AND PROCEDURES

 

A. Disclosure Controls and Procedures

 

As of the end of the period covered by this annual report, our management, with the participation of the Company’s Chief Executive Officer and Chief Administrative Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Administrative Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. Based on this evaluation, our Chief Executive Officer and Chief Administrative Officer, concluded that, as of June 30, 2020, the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level.

 

B. Management’s Annual Report on Internal Control Over Financial Reporting

 

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.

 

The Company’s internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and financial officers and effected by the Company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS, as issued by IASB.

 

The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Therefore even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management performed an assessment of the effectiveness of our internal control over financial reporting on June 30, 2020, utilizing the criteria described in the “Internal Control—Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The objective of this assessment was to determine whether our internal control over financial reporting was effective on June 30, 2020. Based on this assessment, our management has concluded that, as of June 30, 2020, the Company’s internal control over financial reporting was effective at the reasonable assurance level.

 

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C. Attestation Report of the Registered Public Accounting Firm

 

Pursuant to applicable SEC rules, this annual report does not include an attestation report of the Company’s registered public accounting firm.

 

We will only be required to include this report once we become a large accelerated filer or otherwise cease to be an emerging growth company.

 

D. Changes in Internal Control Over Financial Reporting

 

Except for the design and implementation of internal controls over our IT systems to mitigate the risk of cyberattacks, as a response to the cyberincident discussed in “Item 3. Key Information––D. Risk Factors—We were the target of a cybersecurity incident which disrupted our systems” and “Item 5—Operating and Financial Review and Prospects—Recent developments—2020 Cyber Incident,” there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the year ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 16A—AUDIT COMMITTEE FINANCIAL EXPERT

 

For the purposes of the Sarbanes-Oxley Act, our board of directors established a fiscal council (“Fiscal Council”), which convenes at least quarterly, and as often as it determines is appropriate to carry out its responsibilities. This committee has responsibility for planning and reviewing our annual and quarterly reports and accounts with the involvement of our auditors during such process, focusing particularly on compliance with legal requirements and accounting standards. The ultimate responsibility for reviewing and approving our annual and quarterly reports and accounts remains with our board of directors.

 

Our board of directors has determined that Débora de Souza Morsch, a member of the Company’s Fiscal Council, is a “financial expert,” as such term is defined in the SEC rules. Ms. Morsch is independent, as such term is defined in the Novo Mercado listing rules. Our board of directors has determined that Ms. Morsch is independent under the standards of the NYSE listing rules and Rule 10A-3 under the Exchange Act that would apply if the Company were not relying on the exemption provided in paragraph (c)(3) of Rule 10A-3, as described in “Item 16D—Exemptions from the Listing Standards for Audit Committees.” See “Item 6—Directors, Senior Management and Employees—Board Practices” for information regarding Ms. Morsch’s experience.

 

ITEM 16B—CODE OF ETHICS

 

Under Section 303A.10 of the NYSE Listed Company Manual, each U.S. company listed on the NYSE must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers. We are subject to a similar requirement under Brazilian law, and we have adopted a code of ethics that applies to our officers and employees.

 

Our code of ethics, as well as further information concerning our corporate governance practices and applicable Brazilian law, is available on our website www.brasil-agro.com. Information on our website is not incorporated by reference in this annual report.

 

If we make any substantive amendment to the code of ethics or grant any waivers to our executive officers and controller, including any implicit waiver, from a provision of the code of ethics, we intend to disclose the nature of such amendment or waiver on our website. During the year ended June 30, 2020, no such amendment was made or waiver granted.

  

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ITEM 16C—PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table describes the total amount of fees billed to us by our independent auditors for services performed in the fiscal years ended June 30, 2020 and 2019.

 

   Year Ended June 30 
   2020   2019 
   (in R$ thousands) 
Audit fees(1)   945,4    862.8 
Audit-related fees(2)   336,6    92.5 
Tax fees(3)   —    85.0 
Total fees   1.282.0     1,040.3 

 

(1) Audit fees in fiscal year 2019 are the aggregated fees billed by Ernst & Young Auditores Independentes S.S. for the audit of our consolidated and annual financial statements and attestation services that are provided in connection with regulatory filings or engagements.

 

(2) Audit-related fees in fiscal year 2019 were the fees billed by Ernst & Young Auditores Independentes S.S. for interoffice reports regarding: (1) the audit of the consolidated reporting package and internal controls of BrasilAgro for Cresud consolidation purposes, and (2) foreign exchange conversion review work related to BrasilAgro’s consolidation process within Cresud consolidated financial statements.

 

(3) Refers to tax compliance services.

 

Audit Committee Pre-Approval Policies and Procedures

 

Our board of directors has established pre-approval policies and procedures for the engagement of registered public accounting firms for audit and non-audit services. Under such pre-approval policies and procedures, our board of directors reviews the scope of the services to be provided by each registered public accounting firm to be engaged in order to ensure that there are no independence issues and the services are not prohibited under applicable rules.

  

ITEM 16D—EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

In establishing a permanent Fiscal Council, the Company has availed itself of paragraph (c)(3) of Rule 10A-3 under the Exchange Act, which provides a general exemption from the audit committee requirements for a foreign private issuer (such as the Company) with a Fiscal Council, subject to certain requirements.

 

NYSE rules require that listed companies have an audit committee that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertise and (iv) is governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities. However, as a foreign private issuer, the Company may rely on an exemption from the requirement to have an audit committee. The Brazilian corporate law requires companies to have a non-permanent Fiscal Council composed of three to five members who are elected at the general shareholders’ meeting. The Fiscal Council operates independently from management and from a company’s external auditors. Its main function is to monitor the activities of management, examine the financial statements of each fiscal year and provide a formal report to our shareholders.

 

The Company has a permanent Fiscal Council that consists of three members and three alternates and which has ordinary meetings every month. The members of the Company’s Fiscal Council are all financially literate, and one member has accounting expertise that qualifies her as a financial expert. The Company believes that its Fiscal Council meets the requirements for the exemption available to foreign private issuers under the SEC rules regarding audit committees of listed companies. The Fiscal Council is not the equivalent of, or wholly comparable to, a U.S. audit committee. Among other differences, it is not required to meet the standards of “independence” established in Rule 10A-3 and is not fully empowered to act on matters that are required by Rule 10A-3 to be within the scope of an audit committee’s authority. Nonetheless, with the attributions that have been provided to the Fiscal Council to the extent permitted by Brazilian law, the Company believes that its current corporate governance system, taken as a whole, including the ability of the Fiscal Council to consult internal and external experts, is similar to a system having an audit committee functioning as a committee of its Board of Directors, the main difference being that the Fiscal Council does not have authority to appoint our independent auditors. This authority lies with the Company’s board of directors. Accordingly, the Company does not believe that its reliance on the exemption in paragraph (c)(3) of Rule 10A-3 materially adversely affects the ability of the Fiscal Council to act independently and to satisfy the other requirements of Rule 10A-3 to the extent permitted by the Brazilian corporate law. For a further discussion of our Fiscal Council, see “Item 6—Directors, Senior Management and Employees— Board Practices—Fiscal Council.”

 

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ITEM 16E—PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

During the year ended June 30, 2016, we acquired a total of 3,577,900 common shares under our share buyback program, which accounted for 10.55% of our shares outstanding (excluding the shares held by the controlling shareholder).

 

On September 20, 2016, we approved a new buyback program of common shares up to the limit of 1,337,684 common shares, not exceeding the balance of profits reserve available included in our balance sheet on June 30, 2016.

 

During the year ended June 30, 2017, we acquired a total of 1,345,400 common shares under our share buyback program, which accounted for 3.99% of our shares outstanding (excluding the shares held by the controlling shareholder).

 

During the year ended June 30, 2018, we acquired a total of 50,300 common shares under our share buyback program, which accounted for 0.15% of our shares outstanding (excluding the shares held by the controlling shareholder).

 

During the years ended June 30, 2019 and 2020, we did not have a share buyback program in effect. Our last share buyback program was approved on September 20, 2016 for a term of 18 months from September 21, 2016, ending, therefore, on March 21, 2018.

 

ITEM 16F—CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

Not applicable.

 

ITEM 16G—CORPORATE GOVERNANCE

 

Under Section 303A.11 of the NYSE Listed Company Manual and Item 16G of the Form 20-F, we are required to disclose any significant differences in our corporate governance practices from those required to be followed by U.S. companies under the NYSE listing standards. We have summarized these significant differences below.

 

We are permitted to follow practices in Brazil in lieu of the provisions of the NYSE corporate governance standards, except that we are required to have a qualifying audit committee under Section 303A.06 of the NYSE Listed Company Manual or avail ourselves of an appropriate exemption. As a foreign private issuer, we have modified our fiscal council in order to avail ourselves of an exemption from the listing standards for audit committees. See “Item 6—Directors, Senior Management and Employees—Board Practices—Fiscal Council.” In addition, our chief executive officer is obligated, under Section 303A.12(b) of the NYSE Listed Company Manual, to promptly notify the NYSE in writing after any of our executive officers becomes aware of any material non-compliance with any applicable provisions of the NYSE corporate governance standards. We are also required under Section 303A.12(c) of the NYSE Listed Company Manual to submit an annual written affirmation of compliance with applicable provisions of the rules and, under certain circumstances, an interim written affirmation of compliance.

 

Majority of Independent Directors

 

Under Section 303A.01 of the NYSE Listed Company Manual, each U.S. company listed on the NYSE must have a majority of directors that meet the independence requirements of the NYSE. Under the Novo Mercado rules, at least 20% of our directors must be independent for purposes of those rules, and a majority of our directors currently meet that standard.

 

Separate Meetings of Non-Management Directors

 

Under Section 303A.03 of the NYSE Listed Company Manual, the non-management directors of each U.S. company listed on the NYSE must meet at regularly scheduled executive sessions without management, and independent directors must meet at executive sessions without management at least once a year. We do not have a similar requirement under Brazilian rules, but in any event, all members of our board are non-executive directors. Our independent directors do not meet separately from directors who are not independent.

 

Nominating/Corporate Governance Committee

 

Under Section 303A.04 of the NYSE Listed Company Manual, each U.S. company listed on the NYSE must have a nominating/corporate governance committee composed entirely of directors that meet the independence requirements of the NYSE. We are not required to have such a committee under Brazilian law, and accordingly, do not have one.

 

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Compensation Committee

 

Under Section 303A.05 of the NYSE Listed Company Manual, each U.S. company listed on the NYSE must have a compensation committee composed entirely of directors that meet the independence requirements of the NYSE (including additional requirements applicable to compensation committee members). Even though we are not required to have such a committee under Brazilian law, we established one on March 1, 2012. However, our Compensation Committee is not fully independent under the NYSE independence requirements because we are not required to have one under applicable rules, and we believe that the current composition of our Compensation Committee is appropriate for our needs. See “Item 6—Directors, Senior Management and Employees.”

 

The NYSE also requires (1) listed companies to grant the compensation committee, in its sole discretion, the authority to retain or obtain a compensation adviser, to be directly responsible for the compensation and oversight of any compensation adviser so retained with appropriate funding from the listed company and (3) the compensation committee to assess the independence of any compensation adviser, other than the listed company’s in-house legal counsel. As allowed under the NYSE’s listing standards, we continue our current compensation practices in accordance with the Brazilian corporate law and Brazilian practice.

 

Audit Committee

 

Under Section 303A.06 of the NYSE Listed Company Manual and the requirements of Rule 10A-3 of the SEC, each U.S. company listed on the NYSE is required to have an audit committee consisting of members that comply with the requirements of Rule 10A-3 and that meet the independent requirements of the NYSE. In addition, the audit committee must have a written charter compliant with the requirements of Section 303.A.07(b) of the NYSE Listed Company Manual, and the listed company must fulfill all other requirements of the NYSE and Rule 10A-3. The SEC has recognized that, for foreign private issuers, local legislation may delegate certain of the functions of the audit committee to other bodies. We have availed ourselves of an exemption from certain of the standards for audit committees. See “Item 16D—Exemptions from the Listing Standards for Audit Committees,” which explains how our Fiscal Council differs from an audit committee for a U.S. listed company and is incorporated herein by reference.

 

Internal Audit Function

 

Under Section 303A.07(c) of the NYSE Listed Company Manual, each listed company must have an internal audit function. We do not have a similar requirement under Brazilian rules and, therefore, do not have internal auditors.

 

Corporate Governance Guidelines

 

Under Section 303A.09 of the NYSE Listed Company Manual, each U.S. listed company must adopt and disclose their corporate governance guidelines. We do not have a similar requirement under Brazilian law. However, we have listed our common shares on the Novo Mercado of the São Paulo Stock Exchange, which requires adherence to the corporate governance standards described under “Item 9. The Offer and Listing-C. Markets-São Paulo Stock Exchange Corporate Governance Standards.”

 

Further information concerning our corporate governance practices and applicable Brazilian law is available on our website (www.brasil- agro.com). Information on our website is not incorporated by reference in this annual report.

 

ITEM 16H—MINE SAFETY DISCLOSURE

 

Not applicable.

 

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Part III

 

ITEM 17—FINANCIAL STATEMENTS

 

See “Item 18—Financial Statements.”

 

ITEM 18—FINANCIAL STATEMENTS

 

See our Consolidated Financial Statements beginning at page F-1. 

  

ITEM 19—EXHIBITS

 

Exhibit

Number

   Description
1.1   Bylaws of BrasilAgro – Companhia Brasileira de Propriedades Agrícolas (English translation) (incorporated by reference to the Report on Form 6-K furnished to the SEC on November 10, 2015, File No. 001-35723)
2.1   Form of Amended and Restated Deposit Agreement Among BrasilAgro – Companhia Brasileira de Propriedades Agrícolas, the Bank of New York Mellon and Owners and Holders of American Depositary Shares (incorporated by reference to Exhibit 2.01 to the Registration Statement on Form 20-F filed with the SEC on October 31, 2012, File No. 001-35723)
2.2   English translation of the Private Instrument of First Issuance of Simple, Unsecured, Non-Convertible Debentures, to be Converted Into Secured Debentures, in a Single Series, for Private Placement of BrasilAgro – Companhia Brasileira de Propriedades Agrícolas, dated as of February 2, 2018, by and between BrasilAgro – Companhia Brasileira de Propriedades Agrícolas, Interbraf Intermediação de Negócios Ltda., Cibrasec – Companhia Brasileira de Securitização and Pentágono S.A. Distribuidora de Títulos e Valores Mobiliários (Instrumento Particular de Escritura da 1ª Emissão de Debêntures Simples, Não Conversíveis em Ações, da Espécie Quirografária a ser Convolada na Espécie com Garantia Real, em Série Única, para Colocação Privada, da BrasilAgro – Companhia Brasileira de Propriedades Agrícolas) (incorporated by reference to Exhibit 2.2 to the Annual Report on Form 20-F filed with the SEC on October 30, 2018, File No. 001-35723)
2.3   English translation of the First Amendment to the Private Instrument of First Issuance of Simple, Unsecured, Non-Convertible Debentures, to be Converted Into Secured Debentures, in a Single Series, for Private Placement of BrasilAgro – Companhia Brasileira de Propriedades Agrícolas, dated as of May 21, 2018, by and between BrasilAgro – Companhia Brasileira de Propriedades Agrícolas, Interbraf Intermediação de Negócios Ltda., Cibrasec – Companhia Brasileira de Securitização and Pentágono S.A. Distribuidora de Títulos e Valores Mobiliários (1º Aditamento ao Instrumento Particular de Escritura da 1ª Emissão de Debêntures Simples, Não Conversíveis em Ações, da Espécie Quirografária a ser Convolada na Espécie com Garantia Real, em Série Única, para Colocação Privada, da BrasilAgro – Companhia Brasileira de Propriedades Agrícolas) (incorporated by reference to Exhibit 2.3 to the Annual Report on Form 20-F filed with the SEC on October 30, 2018, File No. 001-35723)
2.4   English translation of the Second Amendment to the Private Instrument of First Issuance of Simple, Unsecured, Non-Convertible Debentures, to be Converted Into Secured Debentures, in up to Two Series, for Private Placement of BrasilAgro – Companhia Brasileira de Propriedades Agrícolas, dated as of September 10, 2018, by and between BrasilAgro – Companhia Brasileira de Propriedades Agrícolas, Cibrasec – Companhia Brasileira de Securitização and Pentágono S.A. Distribuidora de Títulos e Valores Mobiliários (2º Aditamento ao Instrumento Particular de Escritura da 1ª Emissão de Debêntures Simples, Não Conversíveis em Ações, da Espécie Quirografária a ser Convolada na Espécie com Garantia Real, em até Duas Séries, para Colocação Privada, da BrasilAgro – Companhia Brasileira de Propriedades Agrícolas) (incorporated by reference to Exhibit 2.4 to the Annual Report on Form 20-F filed with the SEC on October 30, 2018, File No. 001-35723)
2.5   Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
4.1   Stock Option Plan of BrasilAgro – Companhia Brasileira de Propriedades Agrícolas, approved by the Annual Extraordinary Shareholders’ Meeting held on October 29, 2008 (English translation) (incorporated by reference to Exhibit 4.01 to the Registration Statement on Form 20-F filed with the SEC on October 31, 2012, File No. 001-35723)
4.2   Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Araucária (incorporated by reference to Exhibit 4.02 to the Registration Statement on Form 20-F filed with the SEC on October 31, 2012, File No. 001-35723)
4.3   First Amendment to Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Araucária (incorporated by reference to Exhibit 4.03 to the Registration Statement on Form 20-F filed with the SEC on October 31, 2012, File No. 001-35723)
4.4   Second Amendment to Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Araucária (incorporated by reference to Exhibit 4.04 to the Registration Statement on Form 20-F filed with the SEC on October 31, 2012, File No. 001-35723)
4.5   Third Amendment to Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Araucária (incorporated by reference to Exhibit 4.05 to the Registration Statement on Form 20-F filed with the SEC on October 31, 2012, File No. 001-35723)
4.6   Fourth Amendment to Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Araucária (incorporated by reference to Exhibit 4.06 to the Annual Report on Form 20-F filed with the SEC on October 31, 2013, File No. 001-35723)
4.7   Fifth Amendment to Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Araucária (incorporated by reference to Exhibit 4.07 to the Annual Report on Form 20-F filed with the SEC on October 31, 2013, File No. 001-35723)
4.8   Sixth Amendment to Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”)in connection with Fazenda Araucária (incorporated by reference to Exhibit 4.08 to the Annual Report on Form 20-F filed with the SEC on October 19, 2016, File No. 001-35723)

 

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4.9   Seventh Amendment to Agreement to Supply Sugarcane, entered into by BrasilAgro Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Araucária (incorporated by reference to Exhibit 4.08 to the Annual Report on Form 20-F filed with the SEC on October 19, 2016, File No. 001-35723)
4.10   Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Alto Taquari (incorporated by reference to Exhibit 4.06 to the Registration Statement on Form 20-F filed with the SEC on October 31, 2012, File No. 001-35723)
4.11   First Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Alto Taquari (incorporated by reference to Exhibit 4.07 to the Registration Statement on Form 20-F filed with the SEC on October 31, 2012, File No. 001-35723)
4.12   Second Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Alto Taquari (incorporated by reference to Exhibit 4.08 to the Registration Statement on Form 20-F filed with the SEC on October 31, 2012, File No. 001-35723)
4.13   Third Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Alto Taquari (incorporated by reference to Exhibit 4.09 to the Registration Statement on Form 20-F filed with the SEC on October 31, 2012, File No. 001-35723)
4.14   Fourth Amendment to Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Alto Taquari (incorporated by reference to Exhibit 4.12 to the Annual Report on Form 20-F filed with the SEC on October 31, 2013, File No. 001-35723)
4.15   Fifth Amendment to Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Alto Taquari (incorporated by reference to Exhibit 4.13 to the Annual Report on Form 20-F filed with the SEC on October 31, 2013, File No. 001-35723)
4.16   Sixth Amendment to Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Alto Taquari (incorporated by reference to Exhibit 4.08 to the Annual Report on Form 20-F filed with the SEC on October 19, 2016, File No. 001-35723)
4.17   Seventh Amendment to Agreement to Supply Sugarcane, entered into by BrasilAgro and Brenco – Companhia Brasileira de Energia Renovável (“Brenco”), in connection with Fazenda Alto Taquari (incorporated by reference to Exhibit 4.08 to the Annual Report on Form 20-F filed with the SEC on October 19, 2016, File No. 001-35723)
4.18   Assignment of Loan Agreements made as of the 12th day of December 2013 by Helmir S.A. to BrasilAgro Companhia Brasileira de Propriedades Agrícolas (incorporated by reference to Exhibit 4.15 to the Annual Report on Form 20-F filed with the SEC on October 31, 2014, File No. 001-35723)
4.19   Assignment of Advisory Agreement made as of the 12th day of December 2013 by Cresud S.A.C.Y.F. y A. to BrasilAgro – Companhia Brasileira de Propriedades Agrícolas (incorporated by reference to Exhibit 4.16 to the Annual Report on Form 20-F filed with the SEC on October 31, 2014, File No. 001-35723)
4.20   Summary translation of private instrument for regulation of rights and obligations between Brenco - Companhia Brasileira de Energia Renovável and BrasilAgro – Companhia Brasileira de Propriedades Agrícolas (incorporated by reference to Exhibit 4.18 to the Annual Report on Form 20-F filed with the SEC on November 2, 2015, File No. 001-35723)
4.21   Summary translation of agricultural subpartnership agreement between Brenco – Companhia Brasileira de Energia Renovável and BrasilAgro – Companhia Brasileira de Propriedades Agrícolas (incorporated by reference to Exhibit 4.19 to the Annual Report on Form 20-F filed with the SEC on November 2, 2015, File No. 001-35723)
4.22   Summary translation of sugarcane purchase and sale agreement between Brenco – Companhia Brasileira de Energia Renovável and BrasilAgro – Companhia Brasileira de Propriedades Agrícolas (incorporated by reference to Exhibit 4.20 to the Annual Report on Form 20-F filed with the SEC on November 2, 2015, File No. 001-35723)
4.23   Summary translation of Shareholder Agreement of Cresca S.A. dated as of October 5, 2016, by and between BrasilAgro and Cresca S.A. (incorporated by reference to Exhibit 4.24 to the Annual Report on Form 20-F filed with the SEC on October 26, 2017, File No. 001-35723)
4.24   Summary translation of the private instrument of real properties and rural assets purchase and sale commitment and other covenants, dated as of January 11, 2017, by and between Imobiliária Ceibo Ltda.,Agro Pecuária e Industrial Serra Grande Ltda., BrasilAgro and Jaborandi Agricola Ltda. (incorporated by reference to Exhibit 4.25 to the Annual Report on Form 20-F filed with the SEC on October 26, 2017, File No. 001-35723)
4.25   Summary translation of the Private Instrument of Real Properties and Rural Assets Purchase and Sale Commitment and Other Covenants, dated as of March 23, 2017, by and between Imobiliária Araucária Ltda., Fabricio Fries, Celso Fries and BrasilAgro (incorporated by reference to Exhibit 4.26 to the Annual Report on Form 20-F filed with the SEC on October 26, 2017, File No. 001-35723)
4.26   Summary translation of the private instrument of real properties and rural assets purchase and sale commitment and other covenants, dated as of May 22, 2017, by and between Imobiliária Araucária Ltda., Procópio & Oliveira Ltda. – ME, Marcio Antonio de Oliveira and BrasilAgro (incorporated by reference to Exhibit 4.27 to the Annual Report on Form 20-F filed with the SEC on October 26, 2017, File No. 001-35723)
4.27   Summary translation of the private instrument of real properties and rural assets purchase and sale commitment and other covenants, dated as of June 30, 2017, by and between Imobiliária Jaborandi Ltda., Hermes Augusto Ferreira, Emerson Denis Cecchin Ferreira and Jaborandi Agrícola Ltda. (incorporated by reference to Exhibit 4.28 to the Annual Report on Form 20-F filed with the SEC on October 26, 2017, File No. 001-35723)

 

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4.28   Summary translation of the sugarcane purchase and sale agreement dated as of January 11, 2017, by and between Jaborandi Agrícola Ltda., Agro Pecuária e Industrial Serra Grande Ltda. Imobiliária Ceibo Ltda. and BrasilAgro (incorporated by reference to Exhibit 4.30 to the Annual Report on Form 20-F filed with the SEC on October 26, 2017, File No. 001-35723)
4.29   Summary translation of the rural partnership agreement, dated as of January 11, 2017, by and between Jaborandi Agrícola Ltda., Agro Pecuária e Industrial Serra Grande Ltda., Imobiliária Ceibo Ltda. and BrasilAgro (incorporated by reference to Exhibit 4.31 to the Annual Report on Form 20-F filed with the SEC on October 26, 2017, File No. 001-35723)
4.30   Summary translation of the rural partnership agreement, dated as of July 11, 2018, as amended on August 28, 2018, by and between 3SB Produtos Agrícolas S.A., Sinagro Produtos Agropecuários S.A., Marcos Antônio Vimercati, and Brasil Agro in connection with Fazenda Copacabana, Fazenda Dallas, Fazenda Ipanema, Jataí II, Fazenda Princesa, Fazenda Mama, Fazenda Santa Luzia, Fazenda Santa Olímpia, Santa Terezinha and Rubi, Fazenda Santa Olímpia 2 and Fazenda Mata Fresca (incorporated by reference to Exhibit 4.32 to the Annual Report on Form 20-F filed with the SEC on October 30, 2018, File No. 001-35723)
4.31   Summary translation of the private instrument of commitment to purchase and sale of real properties, dated as of June 13, 2018, by and between Imobiliária Jaborandi Ltda., John Kudiess, Harald Kudiess and Jaborandi Agrícola Ltda. in connection with Fazenda Jatobá (incorporated by reference to Exhibit 4.33 to the Annual Report on Form 20-F filed with the SEC on October 30, 2018, File No. 001-35723)
4.32   Summary translation of the rural partnership agreement, dated as of June 13, 2018, by and between Jaborandi Agrícola Ltda. John Kudiess, Harold Kudiess and Imobiliária Jaborandi Ltda. in connection with Fazenda Jatobá (incorporated by reference to Exhibit 4.34 to the Annual Report on Form 20-F filed with the SEC on October 30, 2018, File No. 001-35723)
4.33   Summary translation of the private instrument of commitment to purchase and sale of real property, dated as of April 16, 2018, by and between Imobiliária Mogno Ltda., Maurício Joel de Sá and BrasilAgro in connection with Fazenda Alto Taquari (incorporated by reference to Exhibit 4.35 to the Annual Report on Form 20-F filed with the SEC on October 30, 2018, File No. 001-35723)
4.34   Summary translation of the private instrument of commitment to purchase and sale of real property dated as of April 26, 2018, by and between Imobiliária Araucária Ltda., Fabrício Fries, Diógenes Fries, Vanessa Fries, Celso Fries and BrasilAgro in connection with Fazenda Araucária (incorporated by reference to Exhibit 4.36 to the Annual Report on Form 20-F filed with the SEC on October 30, 2018, File No. 001-35723)
4.35   Summary translation of the rural partnership agreement, dated as of August 29, 2018, by and between Valdeir Ribeiro da Silva, Imobiliária Cajueiro Ltda. and BrasilAgro in connection with Fazenda Chaparral (incorporated by reference to Exhibit 4.38 to the Annual Report on Form 20-F filed with the SEC on October 30, 2018, File No. 001-35723)
4.36   Summary translation of the rural partnership agreement, dated as of July 19, 2018, by and between Laerte Baechtold, Imobiliária Cajueiro Ltda. and BrasilAgro in connection with Fazenda Chaparral (incorporated by reference to Exhibit 4.39 to the Annual Report on Form 20-F filed with the SEC on October 30, 2018, File No. 001-35723)
4.37   English translation of the Long-Term Stock-Based Incentive Program No. 1 Approved at the Board of Directors’ Meeting of BrasilAgro – Companhia Brasileira de Propriedades Agrícolas Held on June 18, 2018 (incorporated by reference to Exhibit 4.40 to the Annual Report on Form 20-F filed with the SEC on October 30, 2018, File No. 001-35723)
4.38   Summary translation of the private instrument of commitment to purchase and sale of real property, entered into on November 1, 2018, in connection with Fazenda Alto Taquari (incorporated by reference to Exhibit 4.39 to the Annual Report on Form 20-F filed with the SEC on October 30, 2019, File No. 001-35723)
4.39   Summary translation of the rural partnership agreement, entered into on May 7, 2019, in connection with Fazenda Chaparral (incorporated by reference to Exhibit 4.41 to the Annual Report on Form 20-F filed with the SEC on October 30, 2019, File No. 001-35723)
4.40   Summary translation of the rural partnership agreement, entered into on June 13, 2019, in connection with Fazenda Santa Luzia (incorporated by reference to Exhibit 4.42 to the Annual Report on Form 20-F filed with the SEC on October 30, 2019, File No. 001-35723)
4.41   Summary translation of the rural partnership agreement, entered into on June 13, 2019, in connection with Fazenda Jataí II (incorporated by reference to Exhibit 4.43 to the Annual Report on Form 20-F filed with the SEC on October 30, 2019, File No. 001-35723)
4.42   Summary translation of the private instrument of commitment to purchase and sale of real property, entered into on June 28, 2019, in connection with Fazenda Jatobá (incorporated by reference to Exhibit 4.44 to the Annual Report on Form 20-F filed with the SEC on October 30, 2019, File No. 001-35723)
4.43   Summary translation of the private instrument of commitment to purchase and sale of real property, entered into on July 11, 2019, in connection with Fazenda Jatobá (incorporated by reference to Exhibit 4.45 to the Annual Report on Form 20-F filed with the SEC on October 30, 2019, File No. 001-35723)

 

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4.44   Summary translation of the rural partnership agreement, entered into on July 26, 2019, in connection with Fazenda Arrojadinho (incorporated by reference to Exhibit 4.46 to the Annual Report on Form 20-F filed with the SEC on October 30, 2019, File No. 001-35723)
4.45   Summary translation of the series B subscription agreement, entered into on September 16, 2019 (incorporated by reference to Exhibit 4.47 to the Annual Report on Form 20-F filed with the SEC on October 30, 2019, File No. 001-35723)
4.46   Summary translation of the private instrument of commitment to purchase and sale of real property, entered into on October 29, 2019, in connection with Fazenda Alto Taquari
4.47   Summary translation of the rural partnership agreement, entered into on December 26, 2019, in connection with Fazenda Serra Grande
4.48   Summary translation of the private instrument of commitment to purchase and sale of real property, entered into on March 22, 2019, in connection with Fazenda Bananal X
4.49   Summary translation of the rural partnership agreement, entered into on February 12, 2020, in connection with Fazenda Chaparral
4.50   Summary translation of the rural partnership agreement, entered into on February 12, 2020, in connection with Fazenda Arrojadinho
4.51   Summary translation of the rural partnership agreement, entered into on March 20, 2020, in connection with Fazenda Chaparral
4.52   Summary translation of the private instrument of commitment to purchase and sale of real property, entered into on April 8, 2020, in connection with Fazenda Alto Taquari
4.53   Summary translation of the private instrument of first amendment to commitment to purchase and sale of real property, entered into on April 8, 2020, in connection with Fazenda Alto Taquari
4.54   Summary translation of the rural lease agreement, entered into on April 9, 2020, in connection with certain assets in Paraguay
4.55   Summary translation of the first amendment to rural partnership agreement, entered into on April 16, 2020, in connection with Fazenda Serra Grande
4.56   Summary translation of the private instrument of commitment to purchase and sale of real property, entered into on April 20, 2020, in connection with Fazenda Serra Grande
4.57   Summary translation of the private instrument of commitment to purchase and sale of real property, entered into on May 10, 2018, in connection with Fazenda Bananal IX
4.58   Summary translation of the private instrument of second amendment to commitment to purchase and sale of real property, entered into on June 26, 2020, in connection with Fazenda Araucária
4.59   Summary translation of the private instrument of commitment to purchase and sale of real property, entered into on June 30, 2020, in connection with Fazenda Jatobá
4.60   Summary translation of the rural partnership agreement, entered into on June 30, 2020, in connection with Fazenda Jatobá
4.61   Summary translation of the second amendment to rural partnership agreement, entered into on June 30, 2020, in connection with Fazenda Jatobá
4.62   Summary translation of the first amendment to rural partnership agreement, entered into on August 10, 2020, in connection with Fazenda Chaparral
4.63   Summary translation of the rural lease agreement, entered into on June 24, 2016, in connection with Fazenda Rio do Meio
4.64   Summary translation of the rural lease agreement, entered into on June 24, 2016, in connection with Fazendas Arrojadinho and Rio do Meio
4.65   Summary translation of the private instrument of commitment to purchase and sale of real property, entered into on May 8, 2018, in connection with Fazenda Bananal IX
4.66   Summary translation of the private instrument of commitment to purchase and sale of real property, entered into on August 7, 2015, in connection with Fazenda Bananal
4.67   Summary translation of the eighth amendment to agreement to supply sugarcane, entered into by BrasilAgro and Brenco, on June 22, 2020, in connection with Fazenda Alto Taquari
4.68   Merger Agreement and Other Covenants between BrasilAgro – Companhia Brasileira de Propriedades Agrícolas and Agrifirma Brasil Holding S.A., Agrifirma Brasil Agropecuária S.A., Brasil Agronegócio – Fundo de Investimento em Participações Multiestratégia, Terras Brasil – Fundo de Investimento em Participações Multiestratégia, and certain other parties listed therein, dated as of November 22, 2019
8.1   List of subsidiaries
12.1   Certification of the Chief Executive Officer and Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
12.2   Certification of the Chief Administrative Officer and Investors Relations Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
13.1   Certification of the Chief Executive Officer and Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.
13.2   Certification of the Chief Administrative Officer and Investor Relations Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.

 

Certain promissory notes and other instruments and agreements with respect to our long-term debt were omitted from the exhibits filed with or incorporated by reference into this annual report, none of which authorizes securities in a total amount that exceeds 10% of our total assets. In addition, certain exhibits to agreements filed with this annual report have been omitted. We hereby agree to furnish to the Commission copies of any such omitted promissory notes, other instruments or agreements and exhibits as the Commission requests.

 

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure, other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

 

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SIGNATURES

 

The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on Form 20-F on its behalf.

 

  BRASILAGRO – COMPANHIA BRASILEIRA DE PROPRIEDADES AGRÍCOLAS
   
  Date: October 30, 2020
   
  /s/ Andre Guillaumon
  Name: Andre Guillaumon
 

Title:   Chief Executive Officer and

Chief Operating Officer

   
  /s/ Gustavo Javier Lopez
  Name: Gustavo Javier Lopez
 

Title:   Chief Administrative Officer and

Investor Relations Officer

 

 

 129 

 

 

 

 

 

 

 

Consolidated Financial Statements

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

 

As of June 30, 2020 and 2019

with Report of Independent Registered Public Accounting Firm

 

 

 

 

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

 

Consolidated Financial statements

 

As of June 30, 2020 and 2019

 

Contents

 

Report of Independent Registered Public Accounting Firm F-2
   
Consolidated financial statements  
   
Consolidated statement of financial position F-3
Consolidated statement of income F-5
Consolidated statement of comprehensive income F-6
Consolidated statement of changes in equity F-7
Consolidated statement of cash flows F-8
Notes to the consolidated financial statements F-9

 

F-1

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of

BrasilAgro Companhia Brasileira de Propriedades Agrícolas

  

Opinion on the Financial Statements

 

We have audited the accompanying consolidated statement of financial position of BrasilAgro Companhia Brasileira de Propriedades Agrícolas (“the Company”) as of June 30, 2020 and 2019, the related consolidated statements of income, other comprehensive income, changes in equity and cash flows for each of the three years in the period ended June 30, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with International Financial Reporting Standards - IFRS as issued by the International Accounting Standards Board - IASB.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Ernst & Young Auditores Independentes S.S.

 

We have served as the Company’s auditor since 2012.

 

São Paulo, Brazil

October 29, 2020 

 

F-2

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Consolidated statement of financial position

June 30, 2020 and 2019

(In thousands of reais)

 

   Notes  2020   2019 
Assets           
Current assets           
Cash and cash equivalents  5.1   171,045    106,627 
Marketable securities  5.2   -    4,038 
Derivative financial instruments  6   7,180    5,906 
Accounts receivable and others  7   183,350    125,320 
Inventories  8   138,778    97,068 
Biological assets  9   115,553    99,881 
Transactions with related parties  29   701    1,987 
Total current assets      616,607    440,827 
              
Non-current assets held for sale  30   25,857    - 
              
Noncurrent assets             
Biological assets  9   25,444    23,235 
Restricted marketable securities  5.2   5,044    9,114 
Derivative financial instruments  6   1,746    1,013 
Deferred taxes  17.1   23,282    20,510 
Accounts receivable and others  7   262,387    203,533 
Investment properties  10   858,261    548,717 
Transactions with related parties  29   1,511    - 
Investments  11   5,742    1,256 
Property, plant and equipment  12   115,925    107,852 
Intangible assets      1,469    1,557 
Right-of-use of assets  13   101,093    - 
Total noncurrent assets      1,401,904    916,787 
              
Total assets      2,044,368    1,357,614 

 

See accompanying notes.

 

F-3

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Consolidated statement of financial position

June 30, 2020 and 2019

(In thousands of reais)

 

   Note  2020   2019 
Liabilities and equity           
Current liabilities             
Trade accounts payable and others  15   111,170    92,954 
Loans, financing and debentures  16   217,274    76,608 
Salaries and payroll obligations      19,600    17,093 
Derivative financial instruments  6   18,333    11,055 
Other liabilities  18   5,017    - 
Transactions with related parties  29   2,849    2,405 
Leases payable  14   25,849    26,503 
Total current liabilities      400,092    226,618 
              
Noncurrent liabilities             
Trade accounts payable and others  15   28,002    19,451 
Loans, financing and debentures  16   296,839    209,245 
Deferred taxes  17.1   34,031    - 
Leases payable  14   126,514    20,943 
Derivative financial instruments  6   1,462    - 
Provision for legal claims  27   1,485    824 
Other liabilities  18   34,374    - 
Total noncurrent liabilities      522,707    250,463 
              
Total liabilities      922,799    477,081 
              
Equity             
Capital  19.a   699,811    584,224 
Capital reserves  1.1   (34,292)   3,645 
Treasury shares  19.f   (31,501)   (35,208)
Income reserves  19.c   358,606    281,052 
Additional dividends proposed  19.d   13,606    7,944 
Other comprehensive income  19.e   115,339    38,876 
Total equity      1,121,569   880,533 
              
Total liabilities and equity      2,044,368    1,357,614 

 

See accompanying notes.

 

F-4

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Consolidated statement of income

Years ended June 30, 2020, 2019 and 2018

(In thousands of reais, unless stated otherwise)

 

   Notes  2020   2019   2018 
Revenue  21.a   487,568    357,910    244,278 
Gain on sale of farms  21.b   61,420    142,812    39,817 
Changes in fair value of biological assets and agricultural products  9   160,371    56,718    99,083 
Adjustment to net realizable value of agricultural products after harvest, net  8.1   (4,153)   (2,040)   883 
Cost of sales  22   (483,813)   (319,214)   (228,319)
Gross profit      221,393    236,186    155,742 
                   
Selling expenses  22   (14,300)   (10,536)   (10,087)
General and administrative expenses  22   (43,890)   (38,812)   (34,945)
Other operating income (expenses), net  24   1,231    (1,064)   35,432 
Share of (loss) profit of a joint venture  11.a   (150)   1,102    14,671 
Operating income      164,284    186,876    160,813 
                   
Financial income (expenses)                  
Financial income  25   375,413    310,538    129,323 
Financial expenses  25   (406,168)   (297,616)   (137,879)
Profit before income and social contribution taxes      133,529    199,798    152,257 
                   
Income and social contribution taxes  17.2   (13,975)   (22,719)   (25,919)
                   
Net profit for the year      119,554    177,079    126,338 
                   
Basic earnings per share - in Brazilian reais  26   2.1092    3.2913    2.3505 
Diluted earnings per share - in Brazilian reais  26   2.0937    3.2727    2.3477 

 

See accompanying notes

 

F-5

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Consolidated statement of comprehensive income

Years ended June 30, 2020, 2019 and 2018

(In thousands of reais)

 

   2020   2019   2018 
             
             
Net profit for the year   119,554    177,079    126,338 
                
Other comprehensive income to be reclassified to statement of income for the year in subsequent periods:               
Currency translation adjustment of foreign operations (Note 19.e)   76,463    (1,007)   27,084 
Currency translation adjustment of the re-distribution of the assets and liabilities of the joint venture (Note 19.e)   -    -    (30,616)
                
Total comprehensive income for the year   196,017    176,072    122,806 

 

See accompanying notes.

 

F-6

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Consolidated statements of changes in equity

Years ended June 30, 2020, 2019 and 2018

(In thousands of reais)

 

          Capital reserves       Income reserves             
   Note  Capital   Additional
paid-in
capital		   Share-based
payments		   Treasury
shares		   Legal
reserve		   Reserve for
investment
and
expansion		   Additional
dividends
proposed		   Other
comprehensive
income		   Retained
earnings /
accumulated
losses		   Total
equity		 
At July 1, 2017      584,224         -    1,525    (36,797)   10,386    58,229    6,486    43,415    -    667,468 
                                                      
Payment of additional dividends  19.d   -    -    -    -    -    -    (6,486)   -    -    (6,486)
Reversal of expired unpaid dividends      -    -    -    -    -    -    -    -    20    20 
Share based compensation  23.a   -    -    844    -    -    -    -    -    -    844 
Exercise of granted stock  19.f   -    -    (372)   2,199    -    -    -    -    -    1,827 
Treasury stock acquired  19.f   -    -    -    (610)   -    -    -    -    -    (610)
Net profit for the year      -    -    -    -    -    -    -    -    126,338    126,338 
Constitution of legal reserve  19.c   -    -    -    -    6,317    -    -    -    (6,317)   - 
Minimum mandatory dividends  19.d   -    -    -    -    -    -    -    -    (30,005)   (30,005)
Additional dividends proposed  19.d   -    -    -    -    -         10,995    -    (10,995)   - 
Constitution of reserve for investment and expansion  19.c   -    -    -    -    -    79,041    -    -    (79,041)   - 
Currency translation adjustment of foreign operation  19.e   -    -    -    -    -    -    -    27,084    -    27,084 
Currency translation adjustment of the re-distribution of the assets and liabilities of the joint venture  19.e   -    -    -    -    -    -    -    (30,616)   -    (30,616)
                                                      
At June 30, 2018      584,224    -    1,997    (35,208)   16,703    137,270    10,995    39,883    -    755,864 
                                                      
Payment of additional dividends  19.d   -    -    -    -    -    -    (10,995)   -    -    (10,995)
Share based compensation  23.a   -    -    1,648    -    -    -    -    -    -    1,648 
Net profit for the year      -    -    -    -    -    -    -    -    177,079    177,079 
Constitution of legal reserve  19.c   -    -    -    -    8,854    -    -    -    (8,854)   - 
Minimum mandatory dividends  19.d   -    -    -    -    -    -    -    -    (42,056)   (42,056)
Additional dividends proposed  19.d   -    -    -    -    -    -    7,944    -    (7,944)   - 
Constitution of reserve for investment and expansion  19.c   -    -    -    -    -    118,225    -    -    (118,225)   - 
Currency translation adjustment of foreign operation  19.e   -    -    -    -    -    -    -    (1,007)   -    (1,007)
                                                      
At June 30, 2019      584,224    -    3,645    (35,208)   25,557    255,495    7,944    38,876    -    880,533 
                                                      
Payment of additional dividends  19.d   -    -    -    -    -    -    (7,944)   -    -    (7,944)
Acquisition of Agrifirma  1.1   115,587    (33,566)   -    -    -    -    -    -    -    82,021 
Share based compensation  23.a   -    -    3,529    -    -         -    -    -    3,529 
Settlement of share-based payments  23.f   -    -    (3,707)   3,707    -    -    -    -    -    - 
Payment of share-based incentive plan (ILPA) charges  23.a   -    -    (4,193)   -    -         -    -    -    (4,193)
Net profit for the year      -    -    -    -    -    -    -    -    119,554    119,554 
Constitution of legal reserve  19.c   -    -    -    -    5,978    -    -    -    (5,978)   - 
Minimum mandatory dividends  19.d   -    -    -    -    -    -    -    -    (28,394)   (28,394)
Additional dividends proposed  19.d   -    -    -    -    -    -    13,606    -    (13,606)   - 
Constitution of reserve for investment and expansion  19.c   -    -    -    -    -    71,576    -    -    (71,576)   - 
Currency translation adjustment of foreign operation  19.e   -    -    -    -    -    -    -    76,463    -    76,463 
                                                      
At June 30, 2020      699,811    (33,566)   (726)   (31,501)   31,535    327,071    13,606    115,339    -    1,121,569 

 

See accompanying notes.

 

F-7

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Consolidated statements of cash flows

Years ended June 30, 2020, 2019 and 2018

(In thousands of reais)

 

   Notes  2020   2019   2018 
CASH FLOW FROM OPERATING ACTIVITIES               
Net profit for the year      119,554    177,079    126,338 
Adjustments to reconcile net profit for the year                  
Depreciation and amortization  22   60,249    23,078    23,222 
Gain from changes in fair value of the re-distribution of the assets and liabilities of the joint venture      -    -    (5,098)
Gain on sale of farm  21.b   (61,420)   (142,812)   (39,817)
Currency translation adjustment of the re-distribution of the assets and liabilities of the joint venture           -    (30,616)
Residual value of property, plant and equipment and intangible assets disposed      3,089    433    433 
Write-off of capitalized costs in investment properties      600    -    10,793 
Share of (loss) profit of a joint venture  11.a   150    (1,102)   (14,671)
Unrealized loss (gain) on derivatives, net  25   7,456    4,475    (1,772)
Unrealized foreign exchange loss (gain), monetary variation and financial charges, net      42,276    15,416    16,054 
Gain on remeasurement of receivable from sale of farms, net  25   (57,327)   (13,989)   (16,584)
Effect of share-based incentive plan – ILPA      1,510    1,648    844 
Deferred income and social contribution taxes  17.2   3,528    12,232    21,044 
Changes in fair value of biological assets and agricultural products  9   (160,371)   (56,718)   (99,083)
Adjustments to net realizable value of agriculutural products after harvest  8.1   4,153    2,040    (883)
Allowance for doubtful accounts  22   (2,440)   (530)   (133)
(Reversal of) Provision for legal claims  27   601    (383)   (387)
       (38,392)   20,867    (10,316)
Changes in working capital                  
Trade accounts receivable      50,692    3,401    (6,746)
Inventories      (43,268)   (31,094)   (58,442)
Biological assets      157,355    34,627    60,312 
Recoverable taxes      3,829    536    1,943 
Derivative financial instruments      3,893    19,308    (16,982)
Other receivables      (21,210)   316    (2,356)
Trade accounts payable      (35,698)   10,005    1,708 
Related parties      (440)   276    (2,338)
Taxes payable      31,146    3,157    1,718 
Income tax and social contribution      -    (413)   1,323 
Salaries and payroll      (2,704)   2,804    2,787 
Advances from customers      (212)   (15,500)   15,540 
Leases payable      (42,688)   3,590    9,470 
Other liabilities      6,721    (542)   115 
Net cash flows from (used in) operating activities      69,024    51,338    (2,264)
                   
CASH FLOW FROM  INVESTING ACTIVITIES                  
                   
Addition to property, plant and equipment and intangible assets      (25,087)   (43,670)   (43,105)
Addition on investment properties      (24,173)   (28,211)   (23,861)
Redemption of (Investment in) marketable securities      7,483    21,737    (4,001)
Addition for future capital  increase  11   -    (49)   - 
Cash acquired from business combinations  1.1   1,071    -    - 
Acquisition of interest in associate  11   (4,127)   -    - 
Cash received from sales of farms and assets      15,538    28,927    5,267 
Net cash flows used in investing activities      (29,295)   (21,266)   (65,700)
                   
CASH FLOW FROM  FINANCING ACTIVITIES                  
                   
Payments of installments of financed acquisition of farm      (2,578)   -    (15,559)
Proceeds from loans, financing and debentures  16   301,009    90,594    270,310 
Interest paid on loans, financing and debentures  16   (86,013)   (4,037)   (10,347)
Payment of loans and financing  16   (143,967)   (73,178)   (105,408)
Treasury stock acquired      -    -    (610)
Dividends paid  19.d   (50,000)   (41,000)   (12,972)
Net cash flows (used in) from financing activities      18,451    (27,621)   125,414 
Increase (decrease) in cash and cash equivalents      58,180    2,451    57,450 
                   
Cash and cash equivalents at beginning of year  5.1   106,627    104,314    43,798 
Effect of exchange rate variation on cash and cash equivalents      6,238    (138)   3,066 
                   
Cash and cash equivalents at end of year  5.1   171,045    106,627    104,314 

 

See accompanying notes.

F-8

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

1.Operations

 

BrasilAgro - Companhia Brasileira de Propriedades Agrícolas (“BrasilAgro” or “Company”) was incorporated on September 23, 2005 and is headquartered at Avenida Brigadeiro Faria Lima, 1309, in São Paulo with branches in the States of Bahia, Goiás, Mato Grosso, Minas Gerais, Maranhão and Piauí, and in Paraguay, in the state of Boquerón. The ultimate parent company of BrasilAgro is Argentine-based Cresud Sociedad Anónima, Comercial, Inmobiliaria, Financiera y Agropecuaria (“Cresud S.A.C.I.F.Y.A.”).

 

BrasilAgro corporate purpose includes:

 

●agriculture, cattle raising and forestry activities of any type and nature and rendering directly or indirectly related services;
●the import and export of agricultural products and inputs and those related to cattle raising activity;
●the purchase, sale and/or rental of properties, land, buildings and real estate in rural and/or urban areas; real estate brokerage involving any type of operations;
●holding interest, as a member, in other companies and commercial ventures of any nature, in Brazil and/or abroad, directly or indirectly related to the purposes described herein; and
●management of its own and third-party assets.

 

The Company has sixteen (16) farms in six (6) Brazilian states and one (1) farm in Paraguay, for a total area of 215,330 hectares of own lands and 53,735 hectares of leased lands.

 

1.1 Business combination – Agrifirma

 

On November 22, 2019, the Company entered into a merger agreement (the “Merger Agreement”) with Agrifirma Holding S.A. (“Agrifirma Holding”). Under the terms of the Merger Agreement, BrasilAgro will merge with Agrifima Holding and receive all of its assets, rights and obligations, holding 100% of the equity capital of the subsidiary Agrifirma Agro Ltda. and its subsidiaries , in exchange for common shares and warrants (“Agrifirma Warrants”) issued by BrasilAgro to the selling shareholders of Agrifirma Holging.

 

Agrifirma Agro Ltda. and its subsidiaries (“Agrifirma”) are engaged in the production, manufacture, storage, trading of agricultural products and the provision of agricultural services, as well as the management and commercial exploration of its properties. Since the group is engaged in activities in the same sector as BrasilAgro, the following impacts are expected immediately: operational, financial and commercial benefits, such as dilution of general and administrative expenses, capture of synergies and economies of scale in the operations and potential appreciation in the value of undeveloped areas.

 

Agrifirma is comprised of its parent company (Agrifirma Agro Ltda..) and four subsidiaries, namely Agrifirma Bahia Agropecuária Ltda., I. A. Agro Ltda., GL Empreendimentos e Participações Ltda. and Agrifirma Delaware LLC, in which Agrifirma holds interests of 99.99%.

 

The completion of the Merger Agreement was subject to certain requirements which, on January 27, 2020, were entirely satisfied and BrasilAgro obtained control of Agrifirma.

 

F-9

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

1.1.1 Number of shares delivered as consideration

 

Based on the terms of the Merger Agreement, the consideration transferred in the form of shares will be determined as followed, as described below: Initial Exchange Ratio (preliminary numbers), Final Exchange Ratio (adjustment in exchange ratio) and Adjustments Due to Indemnifications. The Merger Agreement, also determines a minimum of shares to be transferred of 5,392,872.

 

Initial Exchange Ratio

 

The parties agreed to define a first exchange ratio based on preliminary book values as of June 30, 2019, adjusted for the market value of the real state held by BrasilAgro and Agrifirma Holding, according to an appraisal report issued by a specialized third party. As a result, the number of shares and warrants to be issued to the shareholders of Agrfirma was determined to 5,215,385 shares and 654,487 warrants, as detailed below:

 

   Initial
Exchange
Ratio		 
Unrestricted shares   4,402,404 
Shares with sale restriction   812,981 
Shares issued and delivered (i)   5,215,385 
Agrifirma warrants (ii)   654,487 
    5,869,872 

 

(i)Based on preliminary book values as of June 30, 2019 of Agrifirma, the capital stock of BrasilAgro was increased by R$115,587, from R$584,224 to R$699,811, with the issuance of 5,215,385 new common shares of the Company, which were subscribed for and paid up by the shareholders of Agrifirma, and

 

(ii)Issuance of the Agrifirma Warrants on behalf of one of the selling shareholders, entitling them to subscribe, anytime until January 22, 2022, to up to 654,487 new common shares of the Company, with exercise price of R$0.01 per share (Note 18.b).

 

Final Exchange Ratio

 

In accordance with the Merger Agreement, the Initial Exchange Ratio will be adjusted only to reflect the changes in the book values of the preliminary balance sheet as of June 30 2019 through the acquisition date, on January 27, 2020, date of the consummation of the Merger Agreement.

 

F-10

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

On April 1, 2020, BrasilAgro informed the former shareholders of Agrifirma Holding that the Final Exchange Ratio, based on the changes in net equity from June 30, 2019 to January 27, 2020, was finalized and reached the minimum number established in the merger agreement, totaling 5,392,872 shares as final consideration to be paid by Brasilagro, as detailed below:,

 

   Initial
Exchange
Ratio		   Adjustment
to exchange
ratio		   Final
Exchange
Ratio		 
Unrestricted shares   4,402,404    (357,750)   4,044,654 
Shares with sale restriction   812,981    (66,065)   746,916 
Total shares (i)   5,215,385    (423,815)   4,791,570 
Warrants   654,487    (53,185)   601,302 
    5,869,872    (477,000)   5,392,872 

 

i)The adjustment in the exchange ratio determines that the selling shareholders, the holders of the 5,215,385 shares previously calculated in the preliminary exchange ratio, must return 423,815 shares, in accordance with the final exchange ratio. The share return process is in progress and should be completed up to October 2020.

 

Adjustments for indemnifications

 

The agreement establishes obligations for the payment of compensation by both BrasilAgro and the selling shareholders if certain contractually indemnifiable losses occur within two years as from the date of the Merger Agreement.

 

On June 18, 2020, BrasilAgro and the selling shareholders signed a Settlement Agreement, which the Final Exchange Ratio as agreed at the minimum number shares, totaling 5,392,872 shares. The parties also agreed that given the resolution of a contingency by the date of the Settlement Agreement, the selling shareholders agreed to return the amount of R$3,500,000 in restricted shares and Agrifirma Warrants, as described below, which number was calculated using the market price of Brasilagro’s average share price 90 days before January 27, 2022.

 

The following is the Final Exchange Ratio agreed after considering the Adjustments Due to Indemnifications:

 

   Final Exchange Ratio   Adjustments for indemnifications   Final
Exchange
Ratio adjusted
by indemnifications		 
Unrestricted shares   4,044,654    -    4,044,654 
Shares with sale restriction   746,916    (109,291)   637,625 
Total shares   4,791,570    (109,291)   4,682,279 
Warrants   601,302    (87,985)   513,317 
    5,392,872    (197,276)   5,195,596 

 

F-11

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

1.1.2 Accounting for the transaction by BrasilAgro

 

BrasilAgro estimated the fair value of the identifiable assets and of the liabilities acquired of Agrifirma and of the consideration transferred as of January 27, 2020. For the purposes of estimating the consideration transferred, BrasilAgro considered the number of common shares adjusted by the amount of indemnifications.

 

a) Estimated fair value of identifiable assets and liabilities acquired

 

The table below shows the estimated fair value of identifiable assets and liabilities of Agrifirma as of January 27, 2020 at their fair value:

 

Assets  January 27,
2020		 
Cash and cash equivalents   1,071 
Trade accounts receivable   3,313 
Inventories   1,461 
Biological assets   4,883 
Recoverable taxes and contributions   3,012 
Non-current assets held for sale   23,842 
Related parties   36 
Other credits   6,025 
    43,643 
      
 Other credits   15,986 
Investment properties   197,711 
Property, plant and equipment   23,541 
    237,238 
Total assets   280,881 
      
Liabilities     
Trade accounts payables   792 
Loans and financing   123,862 
Payable income tax and social contribution   19 
Taxes payable   646 
Labor charges   2,894 
Other accounts payable   15,590 
    143,803 
Provision for contingencies   60 
Other accounts payable   3,206 
Deferred tax liabilities   27,763 
Total liabilities   31,029 
      
      
Total net assets at fair value   106,049 
Goodwill (a)   47 
Total consideration   106,096 

 

a)Goodwill is attributed to the profitability expected from synergy gains and economies of scale in the agricultural operations and from the creation of real estate value in undeveloped areas. It is not expected that goodwill will be dedcuctible for tax purposes.

 

F-12

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The following table summarizes the allocation of the estimated consideration transferred to the identifiable assets and liabilities at fair value of Agrifirma:

 

Estimated consideration transferred at fair value

 

   Number
of shares
issued /
to be
issued		   Brasilagro’s
share
market
price as of
January 27,
2020		   Total
consideration
transferred		 
Unrestricted shares   4,044,654    -    115,587 
Capital reserve (Note 19.b)   -    -    (33,566)
Unrestricted shares   4,044,654    20.28    82,021 
                
Shares with sale restriction   637,625    20.28    12,930 
Agrifirma Warrants (a)   513,317    20.27    10,405 
Agrifirma Warrant Dividends (b)   -    -    740 
Estimated consideration at fair value   5,195,596         106,096 

 

To calculate the consideration at fair value on the acquisition date, the following assumptions were considered:

 

a)Unrestricted and restricted shares: to estimate the fair value of the restricted and unrestricted shares, the number of shares based on the Final Exchange Ratio adjusted by Adjustments due to Indemnifications, was calculated considering Brasilagro’s quoted market share price on the B3 (Agro3) as of January 27, 2020.

 

b)Agrifirma Warrants: are measured based on Brasilagro quoted share market price on the B3 as of January 27, 2020, deducting the exercise price of the warrants of R$0.01.

 

c)Agrifirma Warrant Dividends: to estimate the fair value of Agrifirma Bonus Dividends, the average dividend yield of the last four years and Brasilagro’s quoted share market price on the B3 as of January 27, 2020 was considered, discounted to present value.

 

The unrestricted shares issued for the consideration transferred for the acquisition of control of Agrifirma was recognized in equity. The restricted shares, Agrifirma Warrants and Agrifirma Warrant Dividends are recorded in the line Other Liabilities as their final amount may vary due to certain events stated in the agreement and, for such reason, do not meet the definition of equity instrument in accordance with IAS 32 – Financial Instruments, and therefore are recognized as financial liabilities at fair value through profit or loss. The restricted shares are considered in the calculation of basic earnings per share, while the warrants are considered potential common shares and as such included in the calculation of diluted earnings per share.

 

The unrestricted shares does not have the element of variability, and as such is recognized in equity. The difference between the capital increase, in accordance with the Merger Agreement, and the consideration transferred at fair value of the unrestricted shares as of January 27, 2020, totaling R$30,566 (Note 19.b) is registered as Capital Reserve.

 

F-13

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

1.1.3. Other Information

 

The results of the Agrifirma Group are consolidated by BrasilAgro in the period from January 27, 2020 to June 30, 2020, and the amount consolidated into these financial statements is presented below:

 

   1/27/2020
to
6/30/2020		 
Net revenue   19,194 
Net income for the period   1 

 

If the transaction had been consummated on July 1, 2019, the net revenue and loss for the year of Agrifirma consolidated by BrasilAgro would have been as follows:

 

   7/1/2020
to
6/30/2020		 
Net income   27,949 
Loss for the year   (64,305)

 

In addition, there are no differences between the book value and the fair value of receivables as of the date of the transaction.

 

1.2. Sale of Farms

 

Sales of farms in the year ended in June 30, 2020

 

a) Sale of Jatobá IV Farm

 

On July 11, 2019, the Company signed a purchase and sale agreement for a total area of 1,134 hectares (893 agricultural hectares) of the Jatobá Farm, a rural property located in the city of Jaborandi, state of Bahia, for an amount corresponding to 302 bags of soybean per agricultural hectare, totaling R$23,183 as of September 2, 2019.

 

On September 2, 2019, the buyer met the contractual conditions to take possession of the Jatobá IV farm upon the down payment of R$2,698. As a result, revenue was recognized in the statement of income (see Note 21.b) and the remaining balance corresponding to 232,000 soybean bags is recorded in accounts receivable from sales of farms, to be received in six annual installments ending in 2025 (Note 7.1.e – Jatobá IV).

 

b) Sale of Alto Taquari II Farm

 

On October 29, 2019, the Company entered into a purchase and sale agreement for a total area of 85 hectares (65 agricultural hectares) of the Alto Taquari Farm, a rural property located in the City of Alto Taquari, State of Mato Grosso, for an amount corresponding to 1,100 bags of soybean per useful hectare, totaling R$5,513 as of October 29,2019.

 

F-14

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

On the same date, the buyer met the contractual conditions to take possession of the Alto Taquari II farm upon the down payment of R$1,044. As a result, revenue was recognized in the statement of income (see Note 21.b) and the remaining balance corresponding to 57,200 soybean bags is recorded in accounts receivable from sales of farms, to be received in four annual installments ending in 2023 (Note 7.1.e – Alto Taquari II).

 

c) Sale of Alto Taquari III Farm

 

On May 29, 2020, the Company entered into a purchase and sale agreement for a total area of 105 hectares (105 agricultural hectares) of the Alto Taquari Farm, a rural property located in the city of Alto Taquari, state of Mato Grosso, for 1,100 bags of soybean per useful hectare, totaling R$11,037 as of May 29, 2020.

 

On the same date, the buyer met the contractual conditions to take possession of the Alto Taquari III farm upon the down payment of R$1,763. As a result, revenue was recognized in the statement of income (see Note 21.b) and the remaining balance corresponding to 93,478 soybean bags is recorded in accounts receivable from sales of farms, to be received in five annual installments ending in 2025 (Note 7.1.e – Alto Taquari III).

 

d) Sale of Jatobá V Farm

 

On June 30, 2020, the Company entered into a purchase and sale agreement for a total area of 1,875 hectares (1,500 agricultural hectares) of the Jatobá Farm, a rural property located in the city of Jaborandi, state of Bahia, for 300 bags of soybean per useful hectare, totaling R$45,015 as of June 30, 2019.

 

On the same date, the buyer met the contractual conditions to take possession of the Jatobá V farm upon the down payment of R$5,000. As a result, revenue was recognized in the statement of income (see Note 21.b) and the remaining balance corresponding to 397,368 soybean bags is recorded in accounts receivable from sales of farms, to be received in seven annual installments ending in 2026 (Note 7.1.e – Jatobá V).

 

Sales of farms in the year ended in June 30, 2019

 

e) Sale of Jatobá II Farm

 

On June 13, 2018, the Company signed a purchase and sale agreement for a total area of 9,784 hectares (7,485 agricultural hectares) of the Jatobá Farm, a rural property located in the city of Jaborandi, state of Bahia, for an amount corresponding to 285 bags of soybean per usable hectare or R$123,335 as of July 31, 2018.

 

On July 31, 2018, the buyer met the contractual conditions to take possession of the Jatobá II farm upon the down payment of R$21,000. As a result, revenue was recognized in the statement of income (see Note 21.b) and the remaining balance corresponding to 2,133,296 soybean bags is recorded in accounts receivable from sales of farms, to be received in seven annual installments ending in 2025 (Note 7.1.e – Alto Taquari I).

 

f) Sale of Alto Taquari I Farm

 

On November 21, 2018, the Company signed a purchase and sale agreement for a total area of 103 hectares of arable land in the Alto Taquari Farm, for the value of 1,100 bags per useful hectare, totaling R$6,871 as of November 19, 2018.

 

F-15

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

On November 19, 2018, the buyer met the contractual conditions to take possession of the Alto Taquari I farm upon the down payment of R$1,491. As a result, revenue was recognized in the statement of income (see Note 21.b) and the remaining balance corresponding to 90,624 soybean bags is recorded in accounts receivable from sales of farms, to be received in four semi-annual installments ending in 2022 (Note 7.1.e – Alto Taquari I).

 

g) Sale of Jatobá III Farm

 

On June 28, 2019, the Company signed a purchase and sale agreement for a total area of 3,125 hectares (2,473 agricultural hectares) of the Jatobá Farm, a rural property located in the City of Jaborandi, State of Bahia, for 285 bags of soybean per useful hectare, which corresponded to R$47,016 as of June 28, 2019.

 

On June 28, 2019 and on July 31, 2019, the buyer met the contractual conditions to take possession of the Jatobá III farm upon the two down payment of R$5,000 each, totaling R$10,000. As a result, revenue was recognized in the statement of income (see Note 21.b) and the remaining balance corresponding to 563,844 soybean bags is recorded in accounts receivable from sales of farms, to be received in six annual installments ending in 2025 (Note 7.1.e – Jatobá III).

 

Sales of farms in the year ended in June 30, 2018

 

h) Sale of Araucária V

 

On May 3, 2018, the Company disclosed the sale of a 956 hectares area (660 agricultural hectares) of the Araucária Farm. The area was sold for 1,208 soybean bags per usable hectare or R$66,224. The transaction determined a down payment of 79,200 soybean bags in the amount of R$5,267, a second installment corresponding to the same number of soybean bags to be received on September 1, 2018. As a result, revenue was recognized in the statement of income (see Note 21.b) and the remaining balance corresponding to 717,840 soybean bags is recorded in accounts receivable from sales of farms, to be received in six annual installments ending in 2024 (Note 7.1.e – Araucária V).

 

1.4. Acquisition of Serra Grande Farm

 

On April 20, 2020, the Company acquired a total area of 4,489 hectares (2,904 agricultural hectares) of the Serra Grande Farm, a rural property located in the city of Baixa Grande do Ribeiro, state of Piauí, in the amount of R$25,047, corresponding to 282,884 soybean bags per agricultural hectares.

 

On the same date, BrasilAgro met the contractual conditions to take possession of the land upon the down payment of R$8,047. As of June 30, 2020, the remaining balance in the amount of R$14,263 (Note 18), corresponding to 162,000 soybean bags, will be paid in three annual installments upon delivery of 54,000 soybean bags each. The Company maintains its liability measured at fair value through profit or loss, as required by IFRS 13.

 

1.5. New investments

 

Agrofy

 

On June 27, 2019, the Board of Directors approved an investment of US$1,000 (R$4,127) in Agrofy Global for an equity interest of 1.8% in the startup. On September 23, 2019, BrasilAgro paid 50% of the amount (R$2,087), and the remaining balance was paid on December 16, 2019 (Note 11).

 

F-16

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

1.3. Lease

 

a) Lease of Jatobá Farm

 

On June 13, 2018, under the same commitment for the purchase and sale of the Jatobá Farm, as described in Note 1.2, the Company leased another area of the farm, with useful area of 7,468 hectares, for a period of 5 years and with annual payments of 6 bags per hectare or 17% of total production, whichever is greater.

 

b) Lease of Parceria V

 

On August 28, 2018, the Company signed a lease agreement to use a farmland of 23,500 hectares in the city of São Félix do Araguaia, state of Mato Grosso. The new farm will be called Partnership V (see Note 14). The lease will be for 10 years.

 

1.6. Re-distribution of the assets and liabilities of the joint venture Cresca S.A.

 

On October 5, 2016, the Company and Carlos Casado S.A., the sole partner in the joint venture Cresca S.A., each with a 50% interest, agreed to dissolve Cresca business and to make their best efforts to sell to third parties all the assets and liabilities held by Cresca within an agreed-upon period of time, or to re-distribute such assets and liabilities in the event the sale to third parties failed.

 

Cresca assets and liabilities were not sold within the period contractually defined, therefore, the partners agreed to re-distribute Cresca’s assets and liabilities, which was completed in the second quarter of 2017. Through June 30, 2017, certain assets, such as cattle and inventories, and contracts (including labor) of Cresca were transferred to Palmeiras, a wholly-owned subsidiary of the Company located in Paraguay. However, the remaining assets and liabilities, including agricultural properties and financial debts with shareholders, remained under the exclusive ownership and/or responsibility of Cresca.

 

On February 9, 2018, the process of re-distributing Cresca’s assets and liabilities was completed and some assets and liabilities that were still owned by Cresca were transferred to the Company’s wholly-owned subsidiary Agropecuária Moroti S.A.

 

The following is a description of the subsidiaries that received Cresca’s assets and liabilities:

 

- Palmeiras S.A. (“Palmeiras”) – On December 16, 2016, Palmeiras was incorporated in Asunción, the capital city of Paraguay, with partners Jaborandi Agrícola Ltda. holding 1% of the shares and BrasilAgro holding 99% of the shares. Palmeiras was incorporated with the objective to operate the activities of the Company’s investment Cresca.

 

- Agropecuária Moroti S.A. (“Moroti”) – Subsidiary that on February 9, 2018 received all other assets and liabilities of Cresca allocated to BrasilAgro, including land and debts. As part of the transaction, the partners in the joint venture agreed to waive the payment of interest on late payment of the intercompany loans taken by Cresca in the total amount of R$32,962, of which BrasilAgro’s share was R$16,563 (Note 25).

 

The Company obtained control of the assets and liabilities received from Cresca, therefore, as required by IFRS 3 – Business Combinations, the assets acquired and liabilities assumed were remeasured at the fair value on the date control was obtained.

 

F-17

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The estimated fair value of the assets and liabilities transferred to Moroti on February 9, 2018 is shown below:

 

   Book value   Effect of
fair value
measurement		   Fair value 
Assets            
Accounts receivable, inventories and other receivables   4,616    36    4,652 
Recoverable taxes   13    (13)   - 
Investment properties   129,750    11,202    140,952 
Other property and equipment other than land   67    277    344 
    134,446    11,502    145,948 
Liabilities               
Trade payables, taxes and other liabilities   254    6,322    6,576 
 Loans   18,714    82    18,796 
    18,968    6,404    25,372 
Total   115,478    5,098    120,576 

 

The Company recorded a gain of R$5,098 for the difference between the carrying value of the interest in the jointly controlled investment in Cresca of R$115,478 and the fair value of the assets and liabilities transferred to Moroti of R$120,576 (Note 24). The fair value of assets and liabilities was determined based on preliminary estimates and concluded on June 30, 2018. No adjustment to the amounts recorded preliminary was recorded upon conclusion.

 

In addition, the Company reclassified the accumulated currency translation adjustment from the jointly controlled investment in Cresca from comprehensive income to the statement of income for an amount of R$30,616, under “Other Operating income (expenses), net” (Note 24).

 

1.7. COVID-19 Impacts

 

COVID-19 cases were first reported on December 31, 2019, and since then the disease has spread to various countries, including Brazil and Paraguay, where the Company operates, with reports of numerous deaths caused by the new coronavirus. On March 11, 2020, the World Health Organization declared a global pandemic.

 

In March 2020, the Company developed and implemented a plan with various measures to protect the health of the employees, contribute to containing COVID-19 and mitigate its effects on operations. These measures included:

 

●Creating a Prevention and Risk Committee to continuously assess the overall situation, update preventive measures and actions to minimize risks, and coordinate the implementation of action plans;
●Establishing a home office policy for employees who are at risk or who work at the corporate office in São Paulo;
●Adoption of various measures and protocols to protect the safety of all persons involved in the Company’s operational context, following the guidelines of the Brazilian Ministry of Health;
●Contingency plans to support any possible disruption in the Company’s operations.

 

The operations in Brazil and Paraguay continued normally and to date the Company has not had any material impact caused by the spread of COVID-19.

 

COVID-19 could affect the Company’s operations if a significant portion of its workforce cannot work effectively due to the spread of the virus, quarantines, government actions, the shutdown of facilities or other restrictions. Part of the Company’s revenue is generated by the sale of commodities to local clients, but the global market for said commodities relies on an extensive logistics and supply chain, including ports, distribution centers and suppliers. In addition, the high volatility in the U.S. dollar exchange rate and the prices of commodities could result in losses for the Company.

 

F-18

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

With regards to its business, a fact that merits attention is the strong demand for exports benefited by the appreciation of the U.S. dollar. With regards to the logistics chain, no significant disruptions were noted in the logistics and export operations, as well as in inbound shipments of raw materials and goods, most of which had been acquired prior to the quarantine period in Brazil. With regard to sales commitments for the 2019/20 crop year, the Company has not identified any material changes, since their origination is based on a strong correlation between the way the negotiations are conducted and the players selected as commercial partners. Therefore, to date, the Company has not observed any matters related to these commitments. Moreover, the Company is well positioned to surmount the effects caused by covid-19, with its main concerns including its cash preservation, leverage ratio and cost and borrowing efficiency, which are aligned with the risk policies adopted by the Company.

 

Short- and long-term liquidity is preserved, and even any changes in inbound and outbound shipments are scaled to not affect significantly the Company’s financial position. BrasilAgro did not identify significant risks with regard to its capacity to continue operating. Lastly, no material subsequent events related to facts known after June 30, 2020 that should be disclosed were identified.

 

1.8. Cyber attack

 

On October 21, 2019, the Company suffered a ransomware cyberattack that caused a partial and temporary interruption in its operations. The Company implemented its contingency plans, continued operating partially during the cyberattack and reconnected progressively its operating systems after the attack.

 

After the incident, the Company took certain additional preventive measures and revalidated the technological processes to improve the controls to minimize cyberattack risks to which the Company was exposed. Although the cyberattack vector could not be identified, the process and the characteristics of the cyberattack could be identified satisfactorily.

 

The actions implemented, including the controls put in place, improved the security of the information technology systems to avoid new attempts of cyberattacks.

 

2.Basis of preparation and presentation

 

The significant accounting policies applied when preparing these financial statements are described below. These policies are being consistently applied in all years presented, unless otherwise stated.

 

2.1. Basis of preparation

 

On October 27, 2020, the Company’s Executive Board, Board of Directors and Fiscal Council approved the Company’s consolidated financial statements and authorized their issuance.

 

All monetary amounts in these financial statements are presented in thousands of Brazilian Reais, except where otherwise stated. Some of the totals presented in these financial statements may not cast due to rounding.

 

The consolidated financial statements have been prepared and are presented in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB). All the references to IFRS in these financial statements correspond to the IFRS as issued by the IASB.

 

The consolidated financial statements have been prepared on the historical cost basis, except where otherwise stated, as described in the summary of significant accounting policies.

 

F-19

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Management has not identified any significant uncertainty as to the Company’s ability to continue as a going concern in the next 12 months.

 

The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires that Management use judgment in the process of application of the Company’s accounting policies. Those areas requiring a higher level of judgment and with more complexity, as well as the areas in which assumptions and estimates are significant for the financial statements, are disclosed in Note 3.

  

Non-financial data included in these financial statements, such as sales volume, planted and leased area, number of farms, were not examined by the independent auditors.

 

In order to maintain comparability to the current year financial statements, the Company reclassified previous years financial information, as detailed below:

 

Statement of financial position:

 

  2019 
Leasing (i)  As previously stated   Reclassifications   Reclassified 
Leases payable (Note 14)   -    47,446    47,446 
Trade accounts payable and others   138,654    (26,249)   112,405 
Financial lease   21,197    (21,197)   - 

 

Statements of cash flows:

 

  2019   2018 
Leasing (i)  As previously stated   Reclassifications   Reclassified   As previously stated   Reclassifications   Reclassified 
Changes in working capital                        
Trade accounts payable   13,595    (3,590)   10,005    11,178    (9,470)   1,708 
Leases payable   -    3,590    3,590    -    9,470    9,470 

 

   2019   2018 
Fair Value (ii)  As previously stated   Reclassifications   Reclassified   As previously stated   Reclassifications   Reclassified 
Adjustments to reconcile profit for the year                        
Unrealized foreign exchange loss (gain), monetary variation and financial charges, net   12,950    2,466    15,416    12,191    3,863    16,054 
Gain on remeasurement of receivable from sale of farms, net   (11,523)   (2,466)   (13,989)   (12,721)   (3,863)   (16,584)

 

(i)In order to improve presentation of leases payable in the statement of financial position starting fiscal year ended June 30, 2020, all lease payables are presented in the line item Leases payable. For comparability purposes, leases payable that were presented in Trade accounts payable and others and in finance leases as of June 30, 2019, were also reclassified to the Leases payable line item. (Note 14);

 

(ii)Additionally, the Company reclassified the cash flow effects to reconcile the profit for the year within the cash flows from operating activities related to the fair value on remeasurement of receivables from sales of farms for the years ended June 30, 2019 and June 30, 2018 to improve presentation in the statement of cash flows and to ensure comparability with the current year.

 

F-20

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Basis of consolidation

 

The consolidated financial statements comprise the financial statements of BrasilAgro and its subsidiaries as of June 30, 2020, 2019, and 2018 as described bellow:

 

   Ownership % 
   2020   2019   2018 
Jaborandi Agrícola Ltda   99.99    99.99    99.99 
Imobiliária Jaborandi   99.99    99.99    99.99 
Cremaq   99.99    99.99    99.99 
Engenho de Maracaju   99.99    99.99    99.99 
Araucária   99.99    99.99    99.99 
Mogno   99.99    99.99    99.99 
Cajueiro   99.99    99.99    99.99 
Ceibo   99.99    99.99    99.99 
Flamboyant   99.99    99.99    99.99 
Palmeiras   99.99    99.99    99.99 
Moroti (b)   99.99    99.99    99.99 
Agrifirma   99.99    -    - 
Agrifirma Bahia (a)   99.99    -    - 
I.A. Agro (a)   99.99    -    - 
GL (a)   99.99    -    - 
Delaware (a)   100.00    -    - 

 

(a)Subsidiaries of Agrifirma – indirect control.
(b)Subsidiary incorporated during the re-distribution of the assets and liabilities of the Cresca on February 9, 2018.

 

The subsidiaries are fully consolidated from the date of acquisition and consolidation ceases when the Company loses control. The financial statements of the subsidiaries are prepared for the same reporting period of BrasilAgro, using consistent accounting policies. All intergroup balances, revenues and expenses are fully eliminated in the consolidated financial statements.

 

2.2. Foreign currency translation

 

a)Functional and presentation currency

 

The Company’s functional and presentation currency is the Brazilian Real (R$). The items included in the financial statements of the subsidiaries located in Brazil are measured using Brazilian Reais (R$) as their functional currency. The U.S. Dollar is the functional currency of the joint venture Cresca S.A. (“Cresca”), and subsidiaries Palmeiras S.A. (“Palmeiras”) and Agropecuária Moroti S.A. (“Moroti”), all headquartered in Paraguay.

 

b)Transactions and balances in foreign currencies

 

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuations when items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of income.

 

c)Foreign operations

 

In the preparation of the consolidated financial statements, the financial statements of Palmeiras, Moroti and Cresca, are translated into Brazilian reais as follows: a) balance sheet at the exchange rate at year end and b) statement of income and cash flows, at the average exchange rate.

 

The effects from variations in the foreign exchange rate resulting from the translation of foreing operations are presented in “Currency translation adjustment of foreign operations” in the statement of comprehensive income and in the statement of changes in equity.

 

F-21

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

2.3. Investment in joint venture

 

Our investment in the joint venture Cresca, is recorded under the equity method.

 

A joint venture is an agreement whereby the parties sharing joint control are entitled to the net assets of the joint ventures. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about relevant activities require the unanimous consent of the parties sharing control.

 

2.4. Cash and cash equivalents and marketable securities

 

Cash and cash equivalents include cash, bank deposits maturing within 90 days from the transaction date and short-term highly liquid repurchase agreements for which there are no fines or other restrictions for their immediate redemption.

 

Marketable securities include the financial investments provided as guarantee for loans and financing recorded in current and non-current assets based on the maturities of the referred loans and financing.

 

Cash equivalents and marketable securities are measured at fair value through profit and loss.

 

Bank deposit certificates and repo transactions may mature in a term exceeding 90 days, and may have repurchase guarantee contractually provided by the issuer of the security, allowing the redemption of the securities at their original amount invested plus interest, with no penalty. These investments are classified as cash equivalents. Investments in deposit certificates that are not eligible for redemption without penalties are classified as marketable securities.

 

Certain debt agreements require the Company to keep marketable securities as a guarantee for the outstanding balances. Such investments are restricted while held in guarantee. The Company discloses the purchases and sales of such investments as investment activities in the statement of cash flows.

 

Fixed-income investments are intended to maintain the value of the resources held by the Company and not yet allocated to rural activities, and are governed by a policy approved by the Board of Directors.

 

The statement of cash flows in relation to financing and investment activities, include only transactions that have actually impacted cash and cash equivalents.

 

2.5. Financial instruments

 

2.5.1. Classification and measurement

 

a)Financial assets

 

Initial recognition and measurement

 

Financial assets are classified, at initial recognition, as subsequently measured at amortised cost and fair value through profit or loss.

 

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Company’s business model for managing them.Trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient are measured at the transaction price calculated in accordance with IFRS15.

 

F-22

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

In order for a financial asset to be classified and measured at amortised cost, it needs to give rise to cash flows that are ’solely payments of principal and interest (SPPI)’ on the principal amount outstanding.

 

The Company’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.

 

Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Company commits to purchase or sell the asset.

 

Subsequent measurement

 

For the purposes of subsequent measurement, the Company’s financial assets are classified as:

 

i. Financial assets at fair value through profit or loss

 

Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognised in the statement of income.

 

The Company designates certain financial assets at the initial recognition by the fair value through profit or loss. This designation cannot be altered later. This category includes marketable securities, derivative financial instruments and receivables from the sale of farms, which consist of debt instruments recognized in the consolidated balance sheet in “Trade accounts receivable”.

 

Changes in fair value related to credits for the sale of farms designated as fair value through profit or loss are recognized in “Net on remeasurement of receivables from sale of farms” under “Financial income”(Note 25).

 

ii. Financial assets at amortized cost (debt instrument).

 

The Company measures financial assets at amortized cost when both of the following conditions are met:

 

·The financial asset is maintained within a business model which objective is to hold financial assets for the purpose of receiving contractual cash flows.

 

·The contractual terms of the financial asset give rise, on specific dates, to cash flows composed solely of payments of principal and interest on the outstanding principal.

 

Financial assets at amortised cost are subsequently measured using the effective interest ratemethod (EIR) and are subject to impairment. Gains and losses are recognised in statement of income when the asset is derecognised, modified or impaired.

 

The Company’s financial assets at amortised cost includes trade receivables, and loan to an associate and loan to a director included under other non-current financial assets.

 

F-23

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Impairment of financial assets

 

The Company recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

 

The Company considers a financial asset to be in default when contractual payments are overdue more than 90 days. However, in certain cases, the Company may also consider that a financial asset is in default when internal or external information indicate that is unlikely that the Company will receive the full outstanding contractual amounts before taking into account any improvements of the credit held by the Company. A financial asset is derecognized when the Company considers there is no reasonable expectation of recovering the contractual cash flows.

 

The following criteria is used by the Company uses to determine if there is objective evidence of expected credit losses:

 

(i)significant financial difficulty of the issuer or obligor;

(ii)a breach of contract, such as a default or delinquency in interest or principal payments;

(iii)the Company, for economic or legal reasons relating to the borrower’s financial difficulty, grants to the borrower a concession that the lender would not otherwise consider;

(iv)it becomes probable that the borrower will file a petition for bankruptcy or other financial reorganization;

(v)the disappearance of an active market for that financial asset because of financial difficulties; or

(vi)observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:

(vii)adverse changes in the payment status of borrowers in the portfolio; and

(viii)national or local economic conditions that correlate with defaults on the assets in the portfolio.

 

b)Financial liabilities

 

Initial recognition and measurement

 

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss or financial liabilities at amortized cost, as appropriate.

 

The Company’s financial liabilities include trade and other payables, loans and borrowings including bank overdrafts, and derivative financial instruments.

 

Subsequent measurement

 

The measurement of financial liabilities depends on their classification, as described below:

 

i. Financial liabilities at fair value through profit or loss

 

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

 

F-24

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Financial liabilities are classified as held for trade when they are incurred for repurchase in the short term. This category also includes derivate financial instruments contracted by the Company that are not designated as hedge instruments under the hedge relations established under IFRS 9.

 

Gains and losses with held-for-trading liabilities are recognized in the statement of income.

 

Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied.

 

ii. Financial liabilities at amortized cost

 

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate (EIR) method. Gains and losses are recognised in statement of income when the liabilities are derecognised as well as through the EIR amortisation process.

 

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of income.

This category generally applies to interest-bearing loans and borrowings.

 

For more information, see Note 16.

 

2.6. Derivative financial instruments

 

The Company uses derivative financial instruments, such as future exchange contracts, interest rate swaps and forward commodity contracts, to protect against risks related to exchange rates, interest rates and commodity prices, respectively. Derivative financial instruments are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The derivatives are recorded as financial assets when their fair value is positive and as financial liabilities when their fair value is negative.

 

Although the Company uses derivative financial instruments for economic hedge purposes, it has not applied hedge accounting.

 

Any gains or losses arising from changes in the fair value of derivatives during the year are recognized immediately in the statement of income (Note 25). The fair value of derivative financial instruments is disclosed in Note 6.

 

2.7. Trade receivables

 

Trade receivables are amounts due from customers for merchandise and farms sold in the ordinary course of business. If collection is expected in one year or less, trade receivables are classified as current assets, otherwise, they are presented as non-current assets.

 

Trade receivables not related to the sale of farms are initially recognized at fair value, and subsequently, measured at amortized cost under the effective interest rate method, less for expected credit losses, as appropriate.

 

F-25

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Trade receivables related to the sale of farms for which the amount of cash receivable is contractually determined in Reais, equivalent to a quantity of soybean bags at the sale date, are designated at fair value through profit or loss upon initial recognition. The amount of the receivable is subsequently remeasured at each balance sheet date by applying to the contractual committeed quantity of soybean bags by the quotation of soybean for future delivery at the maturity date of each installment (or based on estimates and quotations of brokers when there is no quotation of soybean for future delivery on a specific maturity date) and by translating the resulting U.S. dollars amount to Reais using the U.S. dollar exchange rate for future delivery on the same maturity date (considering that future soybean quotations are denominated in U.S.dollar) and finally discounting the resulting amount to present value. The gain (loss) on remeasurement of the receivable is recognized in financial income and expenses under “Gain (loss) on remeasurement of receivables from sale of farms” (Note 25).

 

2.8. Inventories

 

Agricultural products are measured at fair value less selling expenses. They are reclassified from biological assets to inventories at the time they are harvested.  

 

Seeds, manures, fertilizers, pesticides, fuel, lubricants, warehouse and sundry materials are measured at average acquisition cost.

  

Upon identification of the loss of quality of products which affect their sales (either due to storage, load, transportation and other events related to the operation), these products are counted and physically segregated.

  

An adjustment to net realizable value of agricultural products is recognized when the fair value recorded in inventories is higher than the net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs to sell. Adjustments to net realizable value are recognized in the statement of income in “Adjustment to net realizable value of agricultural products after harvest”.

 

2.9. Biological assets

 

The Company’s biological assets consist mainly of the cultivation of soybean, corn, cotton, sugarcane and beef cattle, which are measured at fair value less costs to sell.

 

Agricultural activity

 

The fair value of biological assets is determined upon their initial recognition and at each subsequent balance sheet date. Gains and losses arising from the changes in fair value of biological assets is determined as the difference between fair value and the costs incurred in the plantation and treatment of crops of biological assets and agricultural products at the balance sheet date, and are recorded in the statement of income in “Changes in fair value of biological assets”. In certain circumstances, the estimated fair value less cost to sell approximate cost incurred at that moment, especially when only a minor biological transformation has taken place or when no material impact is expected from that biological transformation on the price. Biological assets continue to be recorded at their fair value.

 

F-26

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The sugarcane crops productive cycle is five years on average, and for a new cycle to start depends on the completion of the previous cycle. In this regard, the current cycle is classified as biological asset in current assets, and the amount of the constitution of the bearer plant (bearer of the other cycles) are classified as permanent culture in property, plant and equipment . The calculation methodology used to estimate the fair value of the biological asset “sugarcane” was the discounted cash flows at a rate reflecting the risks and the terms of the operation. As such, the Company projected the future cash flows in accordance with the projected productivity cycle, taking into consideration the estimated useful life of each area, the prices of Total Sugar Recoverable (“ATR”), estimated productivity and the related estimated costs of production, including the cost of land, harvest, loading and transportation for each hectare planted.

 

The soybean, corn and cotton are temporary cultures, in which the agricultural product is harvested after a period of time from 110 to 240 days after the planting date, depending on the cultivation, variety, geographic location and climate conditions. The calculation methodology used to estimate the fair value of the grains was the discounted cash flows at a rate reflecting the risk and terms of operations. As such, we projected the future cash flows taking into consideration the estimated productivity, costs to be incurred based on the Company’s budget or on new internal estimates and market prices. The commodities’prices were obtained from quotes on the following boards of trade: CBOT (“Chicago Board of Trade”), B3 (Bolsa, Brasil, Balcão), and NYBOT (“New York Board of Trade”). For the agricultural products not quoted, we used the prices obtained through direct market surveys or disclosed by specialized companies. We considered the related logistic expenses and tax discounts in order to arrive at the prices of each of these products in each production unit of the Company.

 

As mentioned above, the fair value of the biological assets disclosed in the balance sheet was determined using valuation techniques – the discounted cash flows method. The data used in these methods is based on the information observed in the market, whenever possible, and if unavailable, a certain level of judgment is required to establish such fair value. Judgment is used to determine the data to be used, e.g. price, productivity and production cost. Changes in the assumptions on these inputs might affect the fair value of biological assets.

 

Cattle raising activity

 

In 2016, the Company started raising cattle. In Brazil, the main activity consists of producing and raising cattle, which characterizes the activity as bearer. In Paraguay, the main activity is raising and selling cattle, which characterizes the activity as consumable.

 

For segregation purposes, when applicable, the Company classifies its cattle herd into: consumable cattle (current assets), which can be sold as a biological asset for meat production; and bearer cattle (non-current assets), which is used in farm operations to generate other biological assets. At June 30, 2020, the Company only had bearer and consumable cattle, which includes calves, heifers, pregnant heifers, pregnant cows, calves, steers and bulls.

 

The fair value of beef cattle is determined based on market prices, given the existence of an active market. Gain or loss from changes in the fair value of beef cattle is recognized in statement of income for the period (Note 9). The Company considered the prices in the cattle market in Bahia state and in Boqueron (Paraguay), considered the principal market, and the metrics used in the market.

 

Accordingly, consumable cattle and bearer cattle are measured based on observable market prices, weight, and age of the animals.

 

F-27

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

2.10. Investment properties

 

The Company’s business strategy aims mainly at the acquisition, development, exploration and sale of rural properties where agricultural activities can be developed. The Company acquires rural properties believed to have significant potential of appreciation in value by means of maintenance of assets and development of profitable agricultural activities. By acquiring rural properties, the Company seeks to implement higher value added crops and transform these rural properties with investments in infrastructure and technology, in addition to entering into lease contracts with third parties. Based on this strategy, whenever the Company considers that its rural properties are profitable, it sells these rural properties to realize capital gains.

  

The land of rural properties purchased by the Company is measured at acquisition cost, which does not exceed its net realizable value, and is presented in “Non-current assets”. The fair value of each property is disclosed in Note 10.

  

Buildings, improvements and opening of areas in investment properties are measured at historical cost, less accumulated depreciation, following the same criteria described for property, plant and equipment in Note 2.11.

 

2.11. Property, plant and equipment

 

Property, plant and equipment is measured at historical cost less accumulated depreciation. Historical cost includes expenditures directly attributable to the acquisition of the items. Historical cost also includes borrowing costs related to the acquisition of qualifying assets.

 

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be reliably measured. All other repair and maintenance costs are recognized in statement of income, as incurred.

  

Depreciation is calculated using the straight-line method over their estimated useful lives, at the depreciation rates described below:

 

   Annual depreciation rates % 
   2020   2019   2018 
Buildings and improvements   2-25    2-25    2-20 
Equipment and facilities   10    5-10    10 
Vehicles and agricultural machinery   13-20    13-20    13-20 
Furniture and fixtures   10    10    10 
Opening of areas   5-20    5-20    10-20 
Permanent cultures   16-27    16-27    16-27 

 

The residual amount and useful lives of property, plant and equipment are revised and adjusted, if appropriate, at the end of each year.

 

An asset carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount exceeds its estimated recoverable amount.

  

Gains and losses on disposals are determined by comparing the sale price with the carrying amount and are recognized in “Other operating income (expenses), net” in the statement of income.

 

2.12. Intangible assets

 

Intangible assets includes software license and acquired contractual rights and are amortized over their estimated useful life of 5 years. Costs associated with software maintenance are recognized as an expense as incurred.

 

The Company has no intangible assets with indefinite useful life.

 

F-28

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

2.13. Impairment of non-financial assets

 

Pursuant to IAS 36 – Impairment of Assets, assets with finite useful lives are reviewed for impairment indicators on each balance sheet date and whenever events or changes in circumstances indicate that the book value may not be recoverable. If any indication exists, the assets are tested for impairment. An impairment loss is recognized for the difference between the asset’s carrying amount and its recoverable amount.

 

On June 30, 2020 and 2019, no indication of impairment of assets was identified.

 

2.14. Trade accounts payables

 

Trade account payables are obligations to pay for goods or services acquired from suppliers in the ordinary course of business. Trade accounts payables are classified as current liabilities if payment is due within one year or less, otherwise they are classified as non-current liabilities.

 

2.15. Loans, financing and debentures

 

Loans, financing and debentures are recognized initially at fair value, net of transaction costs incurred, and subsequently carried at amortized cost. Any difference between the procceds (net of transaction costs) and the settlement value is recognized in the statement of income over the agreement period using the effective interest rate method.

 

Fees paid in raising credit facilities are recognized as transaction costs to the extent that it is probable that some or all of the facility will be used. In this case, the fee is deferred until the facility is completely in use. To the extent there is no evidence that it is probable that some or all of the facility will be used, the fee is capitalized as a prepayment for liquididation services and amortized over the period of the facility to which it relates.

 

Loans, financing and debentures are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months or longer after the balance sheet date.

 

2.16. Provisions

 

Provisions are recognized when the Company has a present, legal or constructive obligation as a result of past events and it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated.

 

Contingent liabilities arising from labor, tax, civil and administrative claims are recorded at their estimated amount when the likelihood of loss in considered probable (Note 3.a).

 

2.17. Current and deferred income tax and social contribution

 

(a)  Current income tax and social contribution

 

Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the countries where the Group operates and generates taxable income. As allowed by the Brazilian tax legislation, certain subsidiaries opted for a tax regime under which taxable profit is computed as a percentage of revenues. Under this regime, taxable profit for income and social contribution tax is calculated by applying a rate of 8% and 12% on gross revenue, respectively, on which the statutory rates for income and social contribution tax are applied.

 

F-29

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

(b)  Deferred income tax and social contribution

 

Deferred income taxes are recognized for temporary differences between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. A deferred income tax liability is recognized for all the temporary differences, whereas deferred income tax assets are only recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized, including the recognition of a deferred tax asset related to unused tax loss carryforwards. Deferred tax assets and liabilities are classified as non-current. Deferred income tax related to items directly recognized in equity are also recognized in equity.

  

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Such rates are 25% for income tax and 9% for social contribution tax (Note 17).

 

2.18. Employee benefits

 

a) Share-based payments

 

The Company operates a number of equity-settled, share-based compensation plans, under which the entity receives services from employees as consideration for equity instruments (options and shares) of the Company.

 

The cost of transactions settled with shares is recognized as expense for the year, jointly with a corresponding increase in equity during the year in which the conditions of performance and/or provision of services are met. The accumulated expenses recognized in connection with the equity instruments on each base date, until the date of acquisition, reflect the extent to which the acquisition period has expired and the best estimate of the Company as to the number of equity instruments to be acquired.

 

The expense or reversal of expenses for each year represents the changes in accumulated expenses recognized in the beginning and end of the year. Expenses related to services that did not complete their acquisition period are not recognized, except for transactions settled with shares in which the acquisition depends on a market condition or on the non-acquisition of rights, which are treated as acquired, irrespective of whether the market condition or the condition of non-acquisition of rights is fulfilled or not, provided that all other conditions of performance and/or provision of services are met.

 

When an equity instrument is modified, the minimum expense recognized is the expense that would have been incurred if the terms had not been modified. An additional expense is recognized in case the modification raises the total fair value of the consideration paid for such shares or that otherwise benefits, as measured on the date of modification.

 

If an equity instrument is canceled, such instrument is treated as if it was fully acquired on the date of cancellation, and any expenses not yet recognized, relating to the premium, are recognized immediately in the statement of income of the year.

 

F-30

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

This includes any premium whose non-acquisition conditions under the control of the Company or the employee are not met. However, if the canceled plan is replaced by a new plan and substitute grants are generated, on the date it is granted, the canceled grant and the new plan will be treated as a modification of the original grant, as described in the previous paragraph. All cancellations of transactions with share-based payments will be treated the same.

 

b) Profit sharing

 

The Company provides employees a profit-sharing program, under which all of the employees have the right to receive annual bonuses based on the Company’s consolidated financial and operational results, and also on personal goals set for individual employees. Profit sharing is recognized at year end, when the amount can be reliably measured by the Company.

 

2.19. Capital

 

Common shares are recorded in equity. Incremental costs directly attributable to issue new shares or options are shown in equity as a deduction of the issued amount, net of taxes.

 

2.20. Revenue from contracts with customers

 

Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Company’s activities. Revenue is presented net of taxes, returns and discounts.

 

The Company recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Company’s activities, as described below. The Company’s estimates are based on past experience, taking into consideration the type of customer, the type of transaction and transaction specifics.

 

The Company applies the model of IFRS 15 to measure and account for revenue from contracts with clients, which establishes the recognition of revenue in an amount that reflects the Company’s expected consideration in exchange for the transfer of good or services to a client. The model is based on five steps: i) identification of the contracts with customers; ii) identification of the performance obligations within the agreements; iii) determination of the transaction price; iv) allocation of the transaction price to the performance obligations within the agreements; and v) recognition of revenue when the performance obligation is fulfilled.

 

a) Sale of goods

 

Revenue from sales of grains and sugarcane sales is recognized when performance obligations are met, which consists of transforming the significant risks and benefits of ownership of the goods are transferred to the purchaser, usually when the products are delivered to the purchaser at the determined location, according to the agreed sales terms.

 

In the case of grains, the Company normally enters into forward contracts under which the Company is entitled to determine the sale price for the total or partial volume of grains sold, through the delivery date, based on formulas contractually agreed upon. In some cases, the formulas used to determine the sales price are estated in U.S. Dollars. The Reais amount is also contractually determined, which is based on the exchange rate applicable a couple of days prior to settling the transaction. The price can also be adjusted by other factors, such as humidity and other technical characteristics of grains.

 

F-31

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

With regard to the sale of sugarcane, the Company normally enters into sale agreements for future deliveries, in which data such as volume and minimum ATR are pre-fixed. The pricing of sugarcane considers the quantity of ATR per ton of sugarcane delivered, and the ATR index price, which is disclosed every month by Sugarcane Producers Council (Consecana).

 

Upon the delivery of grains, revenue is recognized based on the price determined for each client considering the foreign exchange rate on the delivery date when applicable. After the grains are delivered to the client, the quality and final weight areassessed, and the final price of the transaction is agreed upon, which result in adjusting the original contractual amounts, and any foreign exchange rate variation through the settlement date.

 

b) Sale of farms

 

Revenue from sale of farms is not recognized until performance obligations are met, which consists of: (i) the sale be in completed, (ii) the Company has determined that it is probable the buyer will pay, (iii) the amount of revenue can be measured reliably, and (iv)  the Company has transferred all risks and rewards to the buyer, and does not have a continuing involvement. Usually this coincidies with the buyer making the first down payment, moment when the transfer of possession is completed, according to the contractual terms. The result from sales of farms is presented in the statement of income as “Gain on sale of farms” net of the related cost.

 

c) Sales of beef cattle

 

Revenue from the sale of beef cattle is recognized when performance obligations are met, which consists of transferring the material risks and the benefits of cattle ownership to the buyer, usually when the cattle is delivered to the buyer at the specified place, in accordance with the terms of the sale agreed upon.

 

As for the sale of beef cattle, the Company’s operation consists basically of a project involving the production and sale of beef calves after weaning (this process is called rearing). However, some animals that prove to be infertile may be sold to meat packers for slaughtering. At Paraguay operations, the project consists in fattening and selling these animals for slaughtering. The pricing for sale of cattle is based on the market price of the arroba of fed cattle in the respective market (the arroba price is verified on the transaction date), the animal weight, plus the premium related to the category. The sale of cattle in Brazil and Paraguay operations, in turn, considers the price of the arroba of fed cattle or heifer/cow on the date of sale in the respective market, applied to carcass yields.

 

2.21. Financial income and expenses

 

Includes interest and foreing exchange variations arising from loans and financing contracts, marketable securities, trade accounts receivable, gain and losses on remeasurement of receivables from sale of farms and machinery, gains and losses for changes in fair value of derivative financial instruments, as well as discounts obtained from suppliers for the prepayment trade accounts payable.

 

2.22. Leases

 

The Company has agreements for land leases and agricultural partnerships, as well as service agreements. Accordingly, the Company assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

 

F-32

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Company as lessee

 

The Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Company recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

 

Right-of-use assets

 

The Company recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received.

 

Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets.

 

Lease liabilities

 

At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of the lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating the lease, if the lease term reflects the Company exercising the option to terminate.

 

Variable lease payments that do not depend on an index or rate are recognized as expenses (unless they are incurred to produce inventories) in the period in which the event or condition that triggers the payment occurred.

 

In calculating the present value of lease payments, the Company uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, change in the lease term, change in lease payments (e.g., changes to future payments resulting from a change in the index or rate used to determine such lease payments) or changes in the assessment of an optio to purchase the asset.

 

Short-term leases and low-value asset leases

 

The Company applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered to be low value. Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.

 

F-33

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Company as lessor

 

Leases in which the Company does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the income statement due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned..

 

2.23. Distribution of dividends

 

Distribution of dividends to the Company’s stockholders are recognized as a liability in the Company’s financial statements at year-end based on the Company’s articles of incorporation. Any amount that exceeds the minimum legally required is only approved at the shareholders’ general meeting according to the proposal submitted by the Board of Directors. The tax benefit of interest on equity is recognized in the statement of income.

 

2.24. Adjustment to present value – assets and liabilities

 

Assets and liabilities arising from long-term operations and short-term operations for which the financing component could have a material effect, are adjusted to present value.

 

Accordingly, certain elements of assets and liabilities are adjusted to present value, based on discount rates, which aim to reflect the best estimates of time value of money.

 

The discount rate used varies depending on the characteristics of the assets and liabilities including the risk and terms of the specific item, and it is based on the average rate of loans and financing obtained by the Company, net of inflationary effects.

 

2.25. Basic and diluted earnings (loss) per share

 

Basic earnings (loss) per share is calculated by dividing the available profit by the weighted average number of common shares outstanding during the year.

  

Diluted earnings per share is calculated by dividing the available profit by the weighted average number of common shares outstanding during the year plus the weighted number of additional shares that would be issued if a conversion of all dilutive potential common shares into common shares existed, such as stock options and warrants.

 

2.26. Statement of cash flows

 

Interest paid is classified as cash flows from financing activities since it represents costs for obtaining financial resources, and are not considered cash flows from operating activities of the Company.

 

F-34

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

2.27. Non-financial obligations

 

Given the lack of Pronouncement, Interpretation or Guidance applicable to the specific situation of obligations to deliver fixed amounts of soybean as consideration for the purchase of investment property under IAS 40, Management exercised its judgment to result in information that is:

 

(a)relevant for economic decision-making by the users; and
(b)reliable, so that the financial statements:

 

(i)adequately represent the equity and financial position, the financial performance and the cash flows of the entity;
(ii)reflect the economic essence of transactions, other events and conditions, not merely their legal aspects;
(iii)are judicious; and
(iv)are complete in all material aspects.

 

BrasilAgro believes that the cost of acquisition of investment properties subject to IAS 40 includes the obligation to deliver agricultural products on future dates. This obligation is initially measured at its fair value on the date the property is recognized. The Company adopts criteria for remeasuring the obligation to deliver agricultural products for the purchase of properties at their fair value on each reporting date against profit or loss. The gain (loss) from remeasurement of this obligation is recognized in the financial result in the income statement.

 

2.28. Business combinations

 

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. Acquisition-related costs are expensed as incurred and included in administrative expenses.

 

When the Company acquires a business, the Company evaluates the financial assets and liabilities assumed for appropriate classification and allocation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.

 

Any contingent consideration to be transferred by the acquiring company will be recognized at fair value on the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments, is measured at fair value with the changes in fair value recognised in the income statement in accordance with IFRS 9.

 

Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Company re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss.

 

F-35

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

2.29. Non-current assets held for sale

 

The Company classifies non-current assets as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Non-current assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Costs to sell are the incremental costs directly attributable to the disposal of an asset (disposal group), excluding finance costs and income tax expense.

 

The criteria for held for sale classification is regarded as met only when the sale is highly probable, and the asset or disposal group is available for immediate sale in its present condition. Actions required to complete the sale should indicate that it is unlikely that significant changes to the sale will be made or that the decision to sell will be withdrawn. Management must be committed to the plan to sell the asset and the sale expected to be completed within one year from the date of the classification.

 

Assets and liabilities classified as held for sale are presented separately as current items in the statement of financial position.

 

2.30. Fair value measurement

 

The Company measures financial instruments (such as derivatives) and non-financial instruments (such as biological assets) at fair value on each balance sheet date.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either

 

·in the principal market for the asset or liability; or
·in the absence of a principal market, in the most advantageous market. The principal or more advantageous market must be accessible by the Company.

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

 

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure the fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

 

F-36

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

·Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities;
·Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; and
·Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

 

For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

 

2.31. New standards, amendments and interpretations

 

New or revised pronouncements applied for the first time in the current year

 

In these financial statements, the Company applied for the first tim IFRS 16 - Leases and IFRIC 23 - Uncertainty over income tax treatments. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The nature and effect of the changes as a result of adoption of these new accounting standards are described below.

 

a. IFRS 16 – Leases

 

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognize most leases on the balance sheet.

 

Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 does not have an impact for leases where the Company is the lessor.

 

The Company adopted IFRS 16 using the modified retrospective method of adoption, with the date of initial application of July 01, 2019.

 

The standard had significant impacts on the financial statements, since, according to the new principles introduced by IFRS 16, the Company recognized lease liabilities and right-of-use assets on the date of initial application for leases previously classified as operating leases. The Company’s main contract are related to agricultural partnership operations and land lease, in addition to other less relevant contracts that involve the lease of machinery, vehicles and properties (Note 13).

 

The Company elected to use the transition practical expedient to not reassess whether a contract is, or contains, a lease at July 01, 2019. Instead, the Company applied the standard only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Company also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (short-term leases), and lease contracts for which the underlying asset is of low value (low-value assets).

 

F-37

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The right-of-use of the asset were measured at the amount equivalent to the lease liability, adjusted by the amount of any payments made in advance or accumulated related to these leases that were recognized in the balance sheet immediately prior to the initial adoption of the standard. Lease liabilities are discounted to present value using the incremental borrowing rate of the lessee on the transition date.

 

The impacts of IFRS 16 upon its initial adoption as of July 01, 2019 are presented below. The initial adoption of IFRS 16 did not produce any impacts in equity:

 

   As
previously
stated		   Reclassifications
(Note 2.1)		  

 

 

Reclassified

   Impacts -
IFRS 16		   After
adoption of
IFRS 16		 
Assets                    
Right-of-use of assets (Note 13)   -    -    -    92,794    92,794 
Other assets   1,357,614    -    1,357,614    -    1,357,614 
                          
Total   1,357,614    -    1,357,614    92,794    1,450,408 
                          
Liabilities and shareholders’ equity                         
Leases payable (Note 14)   -    47,446    47,446    92,794    140,240 
Trade accounts payable and others   138,654    (26,249)   112,405    -    112,405 
Finance leases   21,197    (21,197)   -    -    - 
Related-party transactions   2,405    -    2,405    -    2,405 
Other liabilities   314,825    -    314,825    -    314,825 
Shareholders’ Equity   880,533    -    880,533    -    880,533 
                          
Total   1,357,614    -    1,357,614    92,794    1,450,408 

 

e. Interpretation IFRIC 23 – Uncertainty over income tax treatments 

 

The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments.

 

The Interpretation specifically addresses the following:

 

●Whether an entity considers uncertain tax treatments separately
●The assumptions an entity makes about the examination of tax treatments by taxation authorities
●How an entity determines taxable profit ( loss), tax bases, unused tax losses, unused tax credits and tax rates
●How an entity considers changes in facts and circumstances

 

An entity must determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. The interpretation is effective for annual reporting periods beginning on or after January 01, 2019, but certain transition reliefs are available. The Company adopted the standard as of July 1, 2019 and concluded that there are no significant effects on its consolidated financial statements.

 

F-38

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

New or revised pronouncements applied for the first time in the year ended June 30, 2019

 

In fiscal year starting July 1, 2018, the Company adopted IFRS 9, Financial Instruments and IFRS 15, Revenues from Contracts with Customers. The adoption of these new standards did not have any impact in the Company’s statement of income, except for the amended and additional disclosures required by these standards.

 

a. IFRS 9 – Financial Instruments

 

The IASB issued the final version of IFRS 9 – Financial Instruments, which replaces IAS 39 – Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 combines the three aspects of the project for accounting for financial instruments: classification and measurement, asset impairment, and hedge accounting. The standard is applicable for fiscal years beginning on January 1, 2018.

 

Starting July 1, 2018, the Company applied IFRS 9 – Financial Instruments as the basis for recognition, classification and measurement of financial instruments.

 

The main aspects of the new standard applicable to the Company are described below:

 

i. Classification and measurement of financial assets

 

IFRS 9 contains a new approach for the classification and measurement of financial assets that reflect the business model under which assets and their cash flow characteristics are managed. It contains three main categories to classify financial instruments: measured at amortized cost, at fair value through other comprehensive income, and at fair value through profit or loss. The standard eliminates the categories existing in IAS 39 of financial instruments held to maturity, loans and receivables and financial instruments available for sale. This change of nomenclature does not alter how financial instruments are subsequently measured; it only impacts the disclosure of financial instruments by category in the financial statements, as shown below:

 

   6/30/2018   Category
Financial Instruments  Consolidated   IAS 39  IFRS 9
Trade accounts receivable   57,185   Loans and receivables  Amortized cost
Transactions with Related Parties   1,660   Loans and receivables  Amortized cost
Trade accounts payable   48,518   Financial liabilities at amortized cost  Amortized cost
Loans and financing   255,805   Financial liabilities at amortized cost  Amortized cost

 

ii. Impairment of financial assets

 

The new standard replaced the “incurred losses” model of IAS 39 for a prospective model of “expected credit losses.”

 

This requires significant judgment on how changes in economic factors affect expected credit losses. Such provisions are measured in credit losses expected for 12 months and credit losses expected for the lifetime of the asset, that is, credit losses that result from all possible default events throughout the expected life of a financial instrument.

 

The Company selected to apply the simplified approach of IFRS 9 – Financial Instruments to measure the credit losses expected throughout the expected life of the financial instrument.

 

During the year, the Company carried out a detailed evaluation of the impact of IFRS 9 aspects. The conclusion of the evaluation is that there is no relevant impact on the adoption of IFRS 9 on impairment of financial assets due to the fact that the Company already analyses each client individualy for expected losses and the level of losses incurred in receivables is not relevant.

 

F-39

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

b.  IFRS 15 – Revenue from Contracts with Customers

 

IFRS 15 establishes a five-step model to account for revenues from agreements with clients. According to IFRS 15, revenue is recognized for a value that reflects the consideration to which an entity expects to be entitled in exchange for the transfer or goods or services to a client. The new standard on revenue will replace all current requirements for recognition of revenue in accordance with IFRS.

 

Starting from July 1, 2018, the Company adopted the IFRS 15 – Revenue from Contracts with Customers.

 

The standard provides the principles to be applied by an entity to determine the measurement of revenue and how and when it must be recognized, based on five steps: i) identification of the agreements with clients; ii) identification of the performance obligations within the agreements; iii) determination of the transaction price; iv) allocation of the transaction price to the performance obligations within the agreements; and v) recognition of revenue when the performance obligation is fulfilled.

 

The changes establish the criteria for measurement and registration of sales, as they were effectively made with due presentation, as well as registration of the values to which the Company is entitled in the operation, considering any estimates of impairment loss.

 

In preparing to adopt IFRS 15, the Company considered the following:

 

(a) Sales of agricultural products (grains, cotton and sugarcane) and beef cattle

 

For contracts with customers in which the sale of agricultural prodcuts and beef cattle is generally expected to be the only performance obligation, adoption of IFRS 15 did not present any impact on the Company’s revenue and statement of income.

 

The Company expects the revenue recognition to occur at a point in time when control of the agricultural products and beef cattle is transferred to the customer, generally on delivery.

 

(b) Sales of farms

 

For sales of land, revenue is recognized when risks and benefits of ownership of the land is transferred to the customer. This is considered to be the only performance obligation and therefore, according to IFRS 15, revenue is recognized at a point in time, generally when possession of the land is granted to the customer.

 

(c)  Presentation and disclosure requirements

 

The presentation and disclosure requirements in IFRS 15 are more detailed than the past IFRS. The presentation requirements represent a significant change from past practice and increases the volume of disclosures required in the Company’s financial statements. As required by IFRS 15, the Company needs to disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. It also needs to disclose information about the relationship between the disclosure of disaggregated revenue and revenue information disclosed for each reportable segment.

 

The Company analyzed the new standard and identified no relevant impacts on their financial statements, considering the nature of their sale transactions, in which performance obligations are clear and the transfer of control over assets is not complex (it is made to the extent the ownership and benefit are transferred to the beneficiaries).

 

F-40

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Standards issued but not yet in force

 

a. Amendments to IFRS 3: Defining businesses

 

In October 2018, the IASB issued amendments to IFRS 3 regarding the definition of a business to help entities to determine if a set of activities and assets acquired is a business or not. They clarify the minimum requirements for a company, eliminate the assessment of if market participants are capable of replacing missing elements, include guidelines to help entities to evaluate if an acquired process is substantive, determine better the definitions of business and outputs and introduce a test of concentration of optional fair value. New illustrative cases were provided with the amendments.

 

Since the amendments apply prospectively to transactions or other events occurring on the date or after the first-time adoption, the Company will not be affected by these amendments on the transition date.

 

b. Amendments to IAS 1 and IAS 8: Definition of material omission

 

In October 2018, IASB issued amendments to IAS 1 and IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of omission in all standards, with the information material if omitting, misstating or obscuring if it could reasonably influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity

 

Such amendments are not expected to have a significant impact on Company’s individual and consolidated financial statements.

 

There are no other standards and interpretations issued and not yet adopted that may, in the opinion of the Management, significantly impact profit or loss or shareholders’ equity disclosed by the Company.

 

3.Significant accounting estimates and judgments

 

Accounting estimates and judgments are continuously assessed and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the current circumstances.

 

Based on the assumptions, the Company concerning its future. The resulting accounting estimates will, by definition, seldom equal the related actual amounts. The estimates and assumptions that have a significant risk of causing a material misstatement to the carrying amounts of assets and liabilities within the next year are as follows:

 

a) Contingencies

 

The Company is party to different legal and administrative proceedings, as described in Note 27. Provisions are set up for all the contingencies related to legal claims that are estimated to represent probable losses (present obligations resulting from past events in which an outflow of resources is probable, and amounts can be reliably estimated). The evaluation of the likelihood of loss is responsibility of the Company and includes the opinion of outside legal advisors.

 

F-41

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

b) Biological assets

 

The fair value of biological assets recorded in the balance sheet (Note 9) was determined using valuation techniques, including the discounted cash flow method. The inputs for these estimates are based on those observable in the market, whenever possible, and when such inputs are not available, a certain level of judgment is required to estimate the fair value. Judgment includes considerations on data e.g. price, productivity, crop cost and production cost.

 

Changes in the assumptions on these factors might affect the fair value recognized for biological assets.

 

An increase or decrease by 1% in the expected productivity of sugarcane and grains/cotton would result in an increase or decrease in biological asset by R$1,544 and an increase or decrease by 1% in the price of sugarcane and grains/cotton would result in an increase or decrease in biological asset by R$2,203.

 

With regard to cattle, the Company values its stock at fair value based on market price publicly available for the region.

 

c) Investment properties

 

The fair value of investment properties was determined through an appraisal prepared by the Company.

  

The appraisal was performed by means of standards adopted in the market considering the characteristics, location, type of soil, climate of the region, calculation of improvements, presentation of the elements and calculation of the land value, which may differ based on these variables.

 

Methodology used

 

At June 30, 2020, investment properties were valued by applying the comparative analysis methodology adjusted by its related features:

 

i) The valuation relied, among other aspects, on the following information: (i) location of farms, (ii) total area and its related percentages of opening and use;

ii) The market value presented for the farm corresponds to the portion of bare land, for payment in cash, not including machinery, equipment, agricultural inputs, cultivation. The soil adjustment factor (preparation of land for planting) was considered in the assessment of prices;

iii) The value of land for agriculture in the surveyed region, is referenced to the price of soybean bag. The unit amounts of the farms for sale (market researches) were obtained in soybean bags per hectare. Accordingly, the amount in Reais (R$) of the property varies directly due to the variation in the soybean price; and

iv) The soybean price considered at June 30, 2020, was R$85.86 (West Region – Bahia), R$86.76 (Balsas Region – Maranhão), R$84.05 (Alto Taquari Region – Mato Grosso) and R$84.05 (Mineiros Region – Goiás). This amount represents an average in amounts arbitrated by the real estate market of the region due to the great instability in the price of soybean bag.

 

There were no changes in the valuation methodology used to estimate the fair value of the investment properties.

 

F-42

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

d) Deferred income tax

 

The Company recognizes deferred income tax assets and liabilities, as described in Note 17, on tax loss carryforwards and temporary differences between the carrying amount and the tax basis of assets and liabilities using statutory rates. The Company regularly assesses if the deferred income tax assets recognized are recoverable, considering the taxable profit generated in the past as well as the expected future taxable profit, in accordance with a technical feasibility study performed by the Company.

 

e) Leases

 

The Company analyzes its agreements in accordance with the requirements of IFRS 16 and recognizes right-of-use assets and lease liabilities for the lease operations under agreements that meet the requirements of the accounting standard. Management considers as the lease component only the minimum fixed lease payments for the purpose of measuring the lease liabilities. The measurement of lease liabilities corresponds to the total future payments of leases and rentals, adjusted to present value, considering the incremental borrowing rate.

 

f) Non-financial obligations

 

The Company analyzes its agreements in accordance with the requirements of IFRS 16 and recognizes right-of-use assets and lease liabilities for the lease operations under agreements that meet the requirements of the accounting standard. The Management of the Company considers as the lease component only the minimum fixed value for the purpose of measuring the lease liabilities. The measurement of lease liabilities corresponds to the total future payments of leases and rentals, adjusted to present value, considering the nominal discount rate which ranges between 4.82% and 6.91%.

 

For the cases where payments are indexed to the soybean bag, future minimum payments are estimated in number of soybean bags and translated into local currency using the soybean price of each region, on the base date of first-time adoption of IFRS 16, and adjusted to the current price at time of payment. Meanwhile, payments indexed to Consecana are stipulated in tons of sugarcane and translated into local currency based on the Consecana price in effect at the time.

 

4.Financial risk management

 

4.1. Financial risk factors

 

The Company operates with various financial instruments, including cash and cash equivalents, marketable securities, trade accounts receivables, accounts receivable and others, trade accounts payable, accounts payable for the purchase of farms, loans and financing and derivative financial instruments.

 

Certain Company’s operations expose it to market risks, mainly in relation to exchange rates, interest rates and changes in the prices of agricultural commodities. As a result, the Company also enters into derivative financial instruments, used to hedge its exposures with respect to crops or with respect to assets and liabilities recognized in the balance sheet, depending on the nature of the specific operation.

 

Excluding derivative financial instruments, fair value is basically determined using the discounted cash flow method.

 

The amounts recorded under current assets and liabilities are either highly liquid or mature within twelve months, as such their carrying value approximates their fair value.

 

F-43

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

4.2. Policies approved by the Board of Directors for the use of financial instruments, including derivatives

 

The Company’s policies in respect to transactions with financial instruments, which have been approved by the Board of Directors, are as follows: (i) Investment Policy which provides guidelines in respect to Company’s investment of cash, considering the counterparty risk, the nature of instruments and liquidity, among others; (ii) Derivative financial instrument policy which provides guidelines to manage the Company’s exposures to currency risk, interest rate and index risks, and agricultural commodities price risk, always linking the derivative financial instrument to the asset or liability that generates the exposure; and (iii) Risk Policy, which addresses items not covered by the Investment Policy or the Derivative financial instrument Policy including hedge against future cash flows with respect to future production of commodities.

 

a) Cash and cash equivalents, marketable securities, trade accounts receivable, receivable from sale of farms, loans with related parties and accounts payable. The amounts recorded approximate their estimated fair value.

 

b) Loans, financing and debentures. The book value of loans, financing and debentures, denominated in reais have its interest rates either fixed or based on the variation of TJLP (Long Term Interest Rate), SELIC (Special System of Clearance and Custody Rate) and exchange rate and approximates their fair value.

 

4.3. Analysis of exposure to financial asset and liability risks

 

a)Currency risk

 

This risk arises from the possibility that the Company may incur losses due to fluctuations in exchange rates, which reduces the nominal amount of assets or increase the amount of liabilities. This risk also arises with respect to commitments to sell products existing in inventories or agricultural products not yet harvested when sales are made at prices to be fixed at a future date, prices which vary depending on the exchange rate.

 

b)Interest rate and index risk

 

This risk arises from the possibility that the Company may incur losses due to fluctuations in the interest rates or indices which increase financial expenses related to certain contracts for the acquisition of farms, indexed by inflation, such as the IGP-M rate (“FGV”).

 

c)Agricutural commodities price risk

 

This risk arises from the possibility that the Company may incur losses due to fluctuations in the market prices of agricultural products.

 

4.4. Objectives and strategies of risk management and of use of derivative financial instruments

 

The Executive Board is responsible for managing financial risks, and evaluates the Company’s exposure to foreign currency risk, interest rate and index risk and agricultural commodities price risk with respect to assets, liabilities and transactions of the Company. Considering the exposure to such risks, Company management evaluates the convenience, cost and availability in the market of derivative financial instruments which allow the Company to mitigate such risks. After such assessment, the Executive Board decides whether to enter into the transaction within the parameters previously approved in the Policies referred to above, and reports it in the Board of Directors’ meetings.

 

F-44

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

4.5. Risks related to each operating strategy

 

The use of derivative financial instruments as an economic hedge reduce the risks of changes in cash flows arising from risks such as foreign currency, interest rate and price index and agricultural commodities prices.

 

However the change in the fair value of the derivative financial instrument may differ from the change in the cash flows or fair value of the assets, liabilities or forecasted transactions which are being hedged, as a result of different factors, such as, among others, differences between the contract dates, the maturity and settlement dates, or differences in “spreads” on the financial assets and liabilities being hedged and the corresponding spreads in the related legs of the swaps. In the case of the derivative financial instruments strategy to hedge recognized assets and liabilities, management believes that the derivative financial instruments present a high degree of protection with respect to the changes in the assets and liabilities being hedged.

 

In the case of the strategy to hedge forecasted sales of soybean or to hedge accounts payable/receivable, which are susceptible to changes commodity prices, differences may arise due to additional factors, such as differences between the estimated and actual soybean volume to be harvested, or differences between the quoted price of soybean in the international markets where the derivative financial instruments are quoted and the price of soybean in the markets in which soybean is physically delivered/received by the Company. Should the soybean volume effectively harvested be lower than the amount for which derivative financial instruments were contracted, the Company will be exposed to variations in the price of the commodities by the volume hedged in excess and vice-versa should the soybean volume effectively harvested be higher than the hedged volume.

 

In the case of exposure to exchange rates, there is a risk that the volume of U.S. dollars sold through forward contracts will be higher than the volume to which the Company is exposed. In such case, foreign exchange rates risk continues to exist in the same proportion as the mismatch, which could result from a reduction in the expected yield of a certain commodity or in a reduction in prices denominated in foreign currencies.

 

4.6. Restrictions related to the use of derivative financial instruments

 

Additionally, the Company is subjected to credit risk with respect to the counterparty of the derivative financial instrument. The Company has contracted derivative financial instruments either traded in the stock exchanges market or from prime first-tier financial institutions or “trading” companies. The Company understands that, at the balance sheet date, there are no indications of collectability risk with respect to the amounts recognized as assets with respect to derivative financial instruments.

 

The main restrictions by the Company’s policy are as follows:

 

·establishment of policies defined by the Board of Directors;
·prohibition to enter into derivative financial instruments that have not been approved by the Executive Officers;
·maintenance by the Executive Officers of a centralized inventory of outstanding derivative financial instruments contracts;
·daily risk report with the consolidated position provided to a company comprising the Executive Officers and designated members of the Board of Directors;
·monthly monitoring by the Executive Officers of the fair values as reported by the counterparties as compared to the amounts estimated by management; and
·the fair value of the derivative financial instruments is estimated based on the market in which they were contracted and also in which the instruments are inserted

 

F-45

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

4.7. Impact of derivative financial instruments on the statement of income

 

The gains and losses for changes in the fair value of derivative financial instruments are recognized in the statement of income separately between realized profit and loss (corresponding to derivative financial instruments that have already been settled) and unrealized profit and loss (corresponding to derivative financial instruments not yet settled).

 

4.8. Estimate of fair value of derivative financial instruments

 

The fair value of derivative financial instruments traded on stock exchanges (B3 and Chicago Board of Trade) is determined based on the quoted prices at the balance sheet date. To estimate the fair value of derivative financial instruments not traded on stock exchanges the Company uses quotes for similar instruments or information available in the market and uses valuation methodologies widely used and that are also used by the counterparties. The estimates do not necessarily guarantee that such operations may be settled at the estimated amounts. The use of different market information and/or valuation methodologies may have a relevant effect on the amount of the estimated fair value.

 

Specific methodologies used for derivative financial instruments entered into by the Company:

 

·Derivative financial instruments of agricultural commodities - The fair value is obtained by using various market sources, including quotes provided by international brokers, international banks and available on the Chicago Board of Trade (CBOT).

·Derivative financial instruments of foreign currencies - The fair value is determined based on information obtained from various market sources including, as appropriate, B3 S.A. – Brasil, Bolsa, Balcão, local banks, in addition to information sent by the operation counterparty.

 

a)Sensitivity analysis

 

Management identified for each type of derivative financial instrument the conditions for variation in foreign exchange rates, interest rates or commodities prices which may generate loss on assets and/or liabilities which is being hedged or, in the case of derivative financial instruments related to transactions not recorded in the balance sheet, in the fair value of the contracted derivatives.

 

The sensitivity analysis shows the impact from the changes in the market variables on the aforementioned financial instruments of the Company, considering all other market indicators comprised. Upon their settlement, such amounts may differ from those stated below, due to the estimates used in their preparation.

 

This analysis contemplates five distinct scenarios that differ due to the intensity of variation in relation to the current market. At June 30, 2020, as reference for probable scenarios I, II, III and IV, a variation in relation to the current market of 0%, -25%, -50%, +25%, +50%, respectively, was considered.

 

F-46

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The preparation of the probable scenario took into consideration the market prices of each one of the reference assets of derivative financial instruments held by the Company at year end. Since all these assets are traded in competitive and open markets, the current market price is a meaninful reference for the expected price of these assets. Accordingly, since the current market price was the reference for the calculation of both book value and the Probable Scenario, it resulted in no mathematical difference.

 

The assumptions and scenarios are as follows:

 

   2020 
       Devaluation in reais R$   Appreciation in Reais R$ 
   Probable scenario   Scenario I -25%   Scenario II -50%   Scenario III +25%   Scenario IV+ 50% 
                     
Soybean - R$ / bag – July 3, 2020 (CBOT)   106.76    80.07    53.38    133.45    160.14 
Soybean - R$ / bag – November 13, 2020 (CBOT)   106.51    79.88    53.26    133.14    159.77 
Soybean - R$ / bag – December 28, 2020 (CBOT)   106.67    80.00    53.34    133.34    160.01 
Soybean - R$ / bag – February 19, 2021 (CBOT)   106.09    79.57    53.05    132.61    159.14 
Soybean - R$ / bag – June 25, 2021 (CBOT)   106.67    80.00    53.34    133.34    160.01 
Corn - R$ / bag – July 15, 2020 (CBOT)   48.10    36.08    24.05    60.13    72.15 
Corn - R$ / bag – July 16, 2020 (CBOT)   46.26    34.70    23.13    57.83    69.39 
Corn - R$ / bag – September 15, 2020 (CBOT)   46.26    34.70    23.13    57.83    69.39 
Corn - R$ / bag – September 16, 2020 (CBOT)   46.26    34.70    23.13    57.83    69.39 
Corn - R$ / bag – August 27, 2021 (CBOT)   47.44    35.58    23.72    59.30    71.16 
Fed Cattle - R$ / arroba – October 30, 2020 (BM&F)   215.85    161.89    107.93    269.81    323.78 
Cotton - R$ / arroba – November 13, 2020(CBOT)   110.25    82.69    55.13    137.81    165.38 
Cotton - R$ / arroba – December 8, 2020(CBOT)   110.25    82.69    55.13    137.81    165.38 
Cotton - R$ / arroba – November 12, 2021(CBOT)   109.16    81.87    54.58    136.45    163.74 
USD – August 31, 2020   5.45    4.09    2.73    6.81    8.18 
USD – November 30, 2020   5.46    4.10    2.73    6.83    8.19 
USD – June 28, 2021   5.50    4.13    2.75    6.88    8.25 
USD – June 29, 2021   5.50    4.13    2.75    6.88    8.25 
USD – June 30, 2021   5.50    4.13    2.75    6.88    8.25 
USD – July 15, 2021   5.51    4.13    2.76    6.89    8.27 
USD – November 16, 2021   5.56    4.17    2.78    6.95    8.34 
USD – November 17, 2021   5.56    4.17    2.78    6.95    8.34 
Interest (rate%) – August 15, 2023   4.67%   3.50%   2.34%   5.84%   7.01%

 

This sensitivity analysis aims to measure the impact of variable market changes on the aforementioned financial instruments of the Company, considering all other market indicators remain unchanged. Estimated amounts below can significantly differ from amount eventually settled.

 

F-47

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

In addition, the Company presents a summary of possible scenarios for the following 12 months of the Company’s financial instruments. Reliable sources of index disclosure were used for the rates used in the “probable scenario”. 

 

                  Scenario I –   Scenario I - Possible   Scenario II - Remote   Scenario I - Possible   Scenario II - Remote 
(*) annual average rates  At June 30, 2020   Probable   Decrease   -25%   Decrease   -50%   Increase   25%   Increase   50% 
Operation  Risk  Balance (R$)   Notional   Rate   Balance (R$)   Rate(*)   Balance (R$)   Rate   Balance (R$)   Rate   Balance (R$)   Rate   Balance (R$)   Rate 
Short-term investments   CDI   141,095    -    2.15%   (310)   2.37%   (832)   1.78%   (1,679)   1.19%   832    2.96%   1,679    3.56%
Marketable securities   CDI   5,044    -    2.15%   (11)   2.37%   (30)   1.78%   (60)   1.19%   30    2.96%   60    3.56%
Cash - USD   USD   27,688    5,056    5.48    (126)   5.50    (6,954)   4.13    (13,907)   2.75    6,954    6.88    13,907    8.25 
Total cash, cash equivalents      173,827    5,056         (447)        (7,816)        (15,646)        7,816         15,646      
                                                                     
Financing in Paraguay - Palmeiras   USD   (8,590)   (1,569)   5.48    (216)   5.50    11,814    4.13    23,628    2.75    (11,814)   6.88    (23,628)   8.25 
Debentures   CDI   (148,432)   -    2.15%   (327)   2.37%   876    1.78%   1,766    1.19%   (876)   2.96%   (1,766)   3.56%
Financing for agricultural costs   CDI   (40,568)   -    2.15%   (89)   2.37%   243    1.78%   483    1.19%   (243)   2.96%   (483)   3.56%
Financing for working capital   CDI   (77,516)   -    4.94%   -    4.94%   961    3.71%   1,915    2.47%   (961)   6.18%   (1,915)   7.41%
Total financing (b)      (275,106)   (1,569)        (632)        13,894         27,792         (13,894)        (27,792)     
                                                                     
Araucária III   Soybean bags   3,336    39,254    88.20    -    88.20    (834)   66.15    (1,668)   44.10    834    110.25    1,668    132.30 
Araucária IV   Soybean bags   7,258    84,929    88.02    -    88.02    (1,815)   66.01    (3,629)   44.01    1,815    110.02    3,629    132.02 
Araucária V   Soybean bags   37,504    450,000    92.50    -    92.50    (9,376)   69.38    (18,752)   46.25    9,376    115.63    18,752    138.75 
Jatobá I   Soybean bags   2,569    30,000    87.40    -    87.40    (642)   65.55    (1,285)   43.70    642    109.25    1,285    131.10 
Jatobá II   Soybean bags   129,741    1,571,397    97.76    -    97.76    (32,435)   73.32    (64,871)   48.88    32,435    122.20    64,871    146.64 
Jatobá III   Soybean bags   47,384    563,844    97.81    -    97.81    (11,846)   73.36    (23,692)   48.91    11,846    122.27    23,692    146.72 
Jatobá IV   Soybean bags   15,481    184,000    93.10    -    93.10    (3,870)   69.83    (7,741)   46.55    3,870    116.38    7,741    139.66 
Jatobá V   Soybean bags   33,029    397,368    95.73    -    95.73    (8,257)   71.80    (16,515)   47.86    8,257    119.66    16,515    143.59 
Alto Taquari I   Soybean bags   3,545    45,312    86.24    -    86.24    (886)   64.68    (1,773)   43.12    886    107.80    1,773    129.36 
Alto Taquari II   Soybean bags   3,554    42,900    88.55    -    88.55    (889)   66.41    (1,777)   44.27    889    110.68    1,777    132.82 
Alto Taquari III   Soybean bags   7,946    93,478    88.55    -    88.55    (1,987)   66.41    (3,973)   44.27    1,987    110.68    3,973    132.82 
Total receivables from farms      291,347    3,502,482         -         (72,837)        (145,676)        72,837         145,676      
                                                                     
Operations with derivatives, net   Grains   (3,785)   (1,815,489)   (a)    (3,984)   (a)    29,285    (a)    62,554    (a)    (37,252)   (a)    (70,521)   (a) 
Operations with derivatives, net   USD   (12,007)   (38,020)   (a)    (12,007)   (a)    39,271    (a)    90,548    (a)    (63,285)   (a)    (114,563)   (a) 
Operations with derivatives, net   Cattle   -    (54,450)   (a)    -    (a)    3,711    (a)    8,065    (a)    (4,999)   (a)    (9,354)   (a) 
Operations with derivatives, net   Cotton   651    (1,518)   (a)    647    (a)    3,985    (a)    7,322    (a)    (2,690)   (a)    (6,027)   (a) 
Operations with derivatives, net   Ethanol   -    (750)   (a)    -    (a)    336    (a)    672    (a)    (336)   (a)    (672)   (a) 
Operations with derivatives, net   Swap   1,257    11,847    (a)    1,554    (a)    1,733    (a)    1,919    (a)    1,378    (a)    1,207    (a) 
Margin - LFT Socopa   SELIC   3,015    -    2.15%   (7)   2.37%   (18)   1.78%   (36)   1.19%   18    2.96%   36    3.56%
Total derivatives (a)      (10,869)             (13,797)        78,303         171,044         (107,166)        (199,894)     
                                                                     
Cresca, net   USD   (1,724)   (315)   5.48    (9)   5.50    433    4.13    866    2.75    (433)   6.88    (866)   8.25 
Helmir, net   USD   314    57    5.48    -    5.50    (78)   4.13    (157)   2.75    78    6.88    157    8.25 
Total related parties      (1,410)   (258)        (9)        355         709         (355)        (709)     
                                                                     
Serra Grande Farm   Soybean bags   (14,263)   162,000    91.29    -    91.29    3,566    68.47    7,132    45.64    (3,566)   114.11    (7,132)   136.93 
Total Acquisitions payable      (14,263)   162,000         -         3,566         7,132         (3,566)        (7,132)     

 

(*)SOURCE Risks: Bloomberg
(a)For sensitivity analysis of derivative positions, forward rates and prices at each maturity date of the operation were used, according to the table above.
(b)The sensitivity analyses do not consider financing transactions with fixed rate.

 

F-48

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

b)Credit risk

 

Credit risk refers to the risk of the noncompliance by a counterparty of its contractual obligations, leading the Company to incur financial losses. The risk to which the Company is exposed arises from the possibility of not recovering the amounts receivable from the sale of sugarcane, grains, and from the leasing of land.

 

To reduce credit risk in commercial transactions, the Company adopts the practice of defining credit limits in which it analyzes factors such as: the counteerparty’s history, history of its business, commercial references and Credit Protection Institution (Serasa). The Company also constantly monitors the outstanding balances.

 

Currently, management does not expect losses due to the default of its counterparties and has no significant exposure to any individual counterparty.

 

c)Liquidity risk

 

Management policy is to maintain sufficient cash and marketable securities to comply with its financial commitments, due to the mismatch of terms or volume between the estimated amounts receivables and payables.

 

The table below shows the Company’s financial liabilities by maturity. The amounts disclosed in the table are the discounted contractual cash flows, in addition to the net derivative financial instruments, which are recorded at fair value/. With respect to payables for the purchase of farms all amounts due at June 30, 2020 and 2019 are payable upon the fulfillment of certain conditions precedent by the sellers and as a result its payment date cannot be determined and have been considered as payable on demand in the table below and no interest or other financial charges have been considered.

 

   Note  Less than
one year		   From one
to two years		   From
three to
five years		   Above five
years		   Total 
At June 30, 2020                       
Trade payable  15.1   55,603    -    -    -    55,603 
Derivative financial instruments  6   18,333    1,462    -    -    19,795 
Loans, financing and debentures  16   217,274    198,793    82,037    16,009    514,113 
Leases payable  14   25,849    26,200    45,330    54,984    152,363 
Transactions with related parties  29   2,849    -    -    -    2,849 
Other liabilities  18   5,017    29,777    4,597    -    39,391 
                             
At June 30, 2019                            
Trade payable  15.1   37,710    -    -    -    37,710 
Derivative financial instruments  6   11,055    -    -    -    11,055 
Loans, financing and debentures  16   76,608    78,326    124,191    6,728    285,853 
Leases payable  14   26,503    -    -    20,943    47,446 
Transactions with related parties  29   2,405    -    -    -    2,405 

  

4.9. Capital management

 

The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for stockholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital.

 

In order to maintain or adjust the capital structure, the Company may adjust the amount of dividend paid to stockholders, return capital to stockholders or, also, issue new shares or sell assets to reduce, for example, debt.

 

Consistent with others in the industry, the Company monitors capital based on the leverage ratio. This ratio is calculated as net debt divided by total equity. Net debt is calculated as total loans, financing and debentures (including “current and noncurrent loans and financing” as shown in the Consolidated statement of financial position), acquisitions payable and derivatives less cash and cash equivalents and marketable securities..

 

F-49

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The following table demonstrates the financial leverage index.

 

   2020   2019 
Loans, financing and debentures (Note 16)   514,113    285,853 
Total acquisitions payable (Note 18)   39,391    - 
Total derivative financial instruments (Note 6)   10,869    4,136 
    564,373    289,989 
Less: cash and cash equivalents (Note 5.1)   (171,045)   (106,627)
Less: marketable securities (Notes 5.2)   (5,044)   (13,152)
    (176,089)   (119,779)
Net debt   388,284    170,210 
Total equity   1,121,569    880,533 
Financial leverage ratio   34.62%   19.33%

 

4.10. Fair value hierarchy and classification of financial instruments

 

The carrying amount (less impairment) of trade accounts receivable and payables approximate their fair values. The fair value of financial liabilities, for disclosure purposes, is estimated by discounting the future contractual cash flows at the current market interest rate that is available for similar financial instruments.

 

The Company adopted IFRS 7 and IFRS 13 for financial instruments that are measured in the balance sheet at fair value; this requires disclosure of fair value measurements by level of the following fair value measurement hierarchy:

 

●Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).

 

●Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2).

 

●Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

 

F-50

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The following table presents the Company’s assets and liabilities, their classification and the fair value, as well as the level of hierarchy:

 

   June 30, 2020
Consolidated - R$ thousand  Note  Book value   Fair value   Quoted prices in
active markets
(Level 1)		   Significant
observable data
(Level 2)		   Significant
non-observable data
(Level 3)		 
Financial assets measured at amortized cost                       
Current                       
Trade accounts receivable, net  7.1   72,014    72,014    -    72,014    - 
Transactions with related parties  29   701    701    -    701    - 
Non-current                            
Transactions with related parties  29   1,511    1,511    -    1,511    - 
                             
Financial assets measured at fair value through profit and loss                            
Current                            
Cash equivalents  5.1   141,095    141,095    141,095    -    - 
Marketable securities  5.2   -    -    -    -    - 
Receivables from sales of farms, net (c)  7.1   73,678    73,678    -    -    73,678 
Derivative financial instruments (b)  6   7,180    7,180    6,121    1,059    - 
Noncurrent                            
Marketable securities  5.2   5,044    5,044    5,044    -    - 
Receivables from sales of farms, net (c)  7.1   240,074    240,074    -    -    240,074 
Derivative financial instruments (b)  6   1,746    1,746    305    1,441    - 
                             
Non-financial assets measured at fair value                            
Current                            
Biological assets  9   115,553    115,553    -    9,037    106,516 
Noncurrent                            
Biological assets  9   25,444    25,444    -    25,444    - 
                             
Non-financial assets measured at cost                            
Noncurrent                            
Investment properties  10   814,398    1,872,701    -    -    1,872,701 
                             
Financial liabilities measured at amortized cost                            
Current                            
Trade payables  15.1   55,603    55,603    -    55,603    - 
Loans, financing and debentures (a)  16   217,274    217,274    -    217,274    - 
Transactions with related parties  29   2,849    2,849    -    2,849    - 
Noncurrent                            
Loans, financing and debentures (a)  16   296,839    296,839    -    296,839    - 
                             
Financial liabilities measured at fair value through profit and loss                            
Current                            
Leases payable  14   25,849    25,849    -    25,849    - 
Derivative financial instruments (b)  6   18,333    18,333    5,900    12,433    - 
Accounts payable for acquisition of Serra Grande Farm  18   5,017    5,017    -    -    5,017 
Noncurrent                            
Leases payable  14   126,514    126,514    -    126,514    - 
Derivative financial instruments (b)  6   1,462    1,462    645    817    - 
Restricted shares  18   13,490    13,490    13,490    -    - 
Agrifirma warrants  18   10,860    10,860    -    10,860    - 
Agrifirma warrant dividends  18   778    778    -    -    778 
Accounts payable for acquisition of Serra Grande Farm  18   9,246    9,246    -    -    9,246 

 

F-51

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

   June 30, 2019
Consolidated - R$ thousand  Note  Book value   Fair value   Quoted prices in
active markets
(Level 1)		   Significant
observable data
(Level 2)		   Significant
non-observable data
(Level 3)		 
Financial assets measured at amortized cost                       
Current                       
Trade accounts receivable, net  7.1   71,295    71,295    -    71,295    - 
Transactions with related parties  29   1,987    1,987    -    1,987    - 
Financial assets measured at fair value through profit and loss                            
Current                            
Cash equivalents  5.1   81,013    81,013    81,013    -    - 
Marketable securities  5.2   4,038    4,038    4,038    -    - 
Receivables from sales of farms, net (c)  7.1   41,351    41,351    -    -    41,351 
Derivative financial instruments (b)  6   5,906    5,906    3,084    2,822    - 
Noncurrent                            
Marketable securities  5.2   9,114    9,114    9,114    -    - 
Receivables from sales of farms, net (c)  7.1   180,597    180,597    -    -    180,597 
Derivative financial instruments (b)  6   1,013    1,013    27    986    - 
                             
Non-financial assets measured at fair value                            
Current                            
Biological assets  9   99,881    99,881    -    13,887    85,994 
Noncurrent                            
Biological assets  9   23,235    23,235    -    23,235    - 
                             
Non-financial assets measured at cost                            
Noncurrent                            
Investment properties  10   526,956    1,471,248    -    -    1,471,248 
                             
Financial liabilities measured at amortized cost                            
Current                            
Trade payables  15.1   37,710    37,710    -    37,710    - 
Loans, financing and debentures (a)  16   76,608    76,608    -    76,608    - 
Transactions with related parties  29   2,405    2,405    -    2,405    - 
Noncurrent                            
Loans, financing and debentures (a)  16   209,245    209,245    -    209,245    - 
                             
Financial liabilities measured at fair value through profit and loss                            
Current                            
Leases payable  14   26,503    26,503    -    26,503    - 
Derivative financial instruments (b)  6   11,055    11,055    9,127    1,928    - 
Noncurrent                            
Leases payable  14   20,943    20,943    -    20,943    - 

 

(a)The book value of loans, financing and debentures presented in the financial statements approximates the fair value, since the rates of these instruments are substantially subsidized and there is no intention of early settlement;
(b)The derivative transactions negotiated at active market are measured at fair value at Level 1, over-the-counter transactions are measured at Level 2, as presented in the table above
(c)Due to market volatility, one of the non-observable inputs became significant and the receivables from sales of farms were reclassified from Level 2 to Level 3. The Company’s policy is to recognize transfers from and to Level 3 on the date of the event or change in the circumstances that caused the transfer.

 

F-52

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The significant non-observable inputs used in the measurement of the fair value of the credits from the sale of the farm classified as Level 3 in the fair value hierarchy, along with an analysis of quantitative sensitivity on June 30, 2020, are as follows. There were no reclassifications from levels 1 to 2 or from levels 2 to 3:

 

Description   Evaluation method   Significant non-observable inputs   Variation of non-observable inputs   Sensitivity of inputs to fair value
Receivables from sales of farms   Discounted cash flow    Premium (or Basis)   (0.18) - 0.02 USD/bu   The increase or decrease of 0.20 USD/bu in the premium (or basis) paid for the soybean would result in an impact of R$7,061. An increase or decrease of 2,4% in the receivables from the farm.
Payables due to acquisition of Serra Grande Farm   Discounted cash flow    Premium (or Basis)   (0.38) -0.02 USD/bu   The increase or decrease of 0.20 USD/bu in the premium (or basis) paid for the soybean would result in an impact of R$380.185. An increase or decrease of 2.7% in payables for the farm.

   

5.Cash and cash equivalents and marketable securities

 

5.1. Cash and cash equivalents

 

   CDI*   2020   2019 
Cash and banks   -    29,950    25,614 
Repurchase agreements (a)   62%   15,446    12,632 
Bank deposit certificates   99.3% to 101%   125,649    46,262 
Brazilian treasury bonds   101 to 102%   -    22,119 
         171,045    106,627 

 

*Interbank Deposit Certificates

 

(a)The Company uses this type of investment for funds that will be redeemed in less than 30 days, according to the projected cash flow and also in case of need to invest funds that were received after banking hours.

 

The Company has R$27,688 (R$21,390 as of June 30, 2019), of bank balances denominated in foreign currencies which do not bear any interest.

 

5.2. Marketable securities

 

   CDI*   2020   2019 
Bank deposit certificates (a)   98%   -    3,983 
Treasury financial bills (c)        -    55 
Total current        -    4,038 
                
Banco do Nordeste (BNB) (a) / (b)   99%   5,044    9,114 
Total noncurrent        5,044    9,114 
                
Marketable securities        5,044    13,152 

 

(a) Indexed to rates from 98% to 99% of the CDI – Interbank Deposit Certificate.

(b) The securities in BNB consist of CDBs provided as collateral for financing from the Bank and must be held up to the end of the contract.

(c) Treasury bonds indexed to the Selic rate.

 

F-53

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

6. Derivative financial instruments

 

                        2020 
                   Volume / Position 
Risk  Maturity  Outstanding derivative instruments  Counterparty  Receivable   Payable   Total
Net balance		   Notional (’000)   Short (long) position   Unit 
Currency US$  August-20  NDF  Rabobank   141    -    141    (4,600)   -    US$ 
Currency US$  November-20  NDF  Rabobank   -    (221)   (221)   (1,500)   -    US$ 
Currency US$  November -20  NDF  Itaú BBA   -    (8,958)   (8,958)   (14,000)   -    US$ 
Currency US$  June-21  NDF  Rabobank   -    (1,426)   (1,426)   (4,930)   -    US$ 
Currency US$  June -21  NDF  Banco do Brasil   -    (1,828)   (1,828)   (6,500)   -    US$ 
Currency US$  June -21  NDF  OLAM   733    -    733    (1,500)   -    US$ 
Currency US$  June -21  NDF  Banco do Brasil   185    -    185    (1,300)   -    US$ 
Currency US$  July-21  NDF  Banco do Brasil   106    (311)   (205)   (1,450)   -    US$ 
Currency US$  July -21  NDF  Rabobank   -    (367)   (367)   (1,440)   -    US$ 
Currency US$  November -21  NDF  Rabobank   -    (139)   (139)   (520)   -    US$ 
Currency US$  November -21  NDF  Macquarie   78    -    78    (280)   -    US$ 
                                        
      Current   1,059    (12,433)   (11,374)   (34,330)   -    US$ 
      Non-current   184    (817)   (633)   (3,690)   -    US$ 
      Total currency risk   1,243    (13,250)   (12,007)   (38,020)   -    US$ 
                                        
Soybean CBOT  July -20  Soybean options  Trading Companies/Banks/CBOT   -    (1)   (1)   -    (83,344)   bags 
Soybean CBOT  February-21  Soybean options  Trading Companies/ Banks /CBOT   252    (774)   (522)   -    (199,571)   bags 
Soybean CBOT  June-21  Soybean options  Trading Companies/ Banks /CBOT   1,718    (1,916)   (198)   -    (301,625)   bags 
Soybean CBOT  November-20  Soybean futures  Trading Companies/ Banks /CBOT   -    (16)   (16)   -    (77,107)   bags 
Soybean CBOT  December-20  Accrual  Trading Companies/ Banks /CBOT   47    (40)   7    -    (83,911)   bags 
Corn BM&F  July -20  Corn options  Itaú BBA   -    (55)   (55)   -    (16,650)   bags 
Corn BM&F  September-20  Corn futures  Macquarie   -    (529)   (529)   -    (83,250)   bags 
Corn BM&F  September -20  Corn options  BM&F   -    (1,431)   (1,431)   -    (253,350)   bags 
Corn BM&F  September -20  Corn options  Itaú BBA   -    (682)   (682)   -    (166,500)   bags 
Corn CBOT  August-21  Corn options  FC Stone   178    (130)   48    -    (84,670)   bags 
Corn CBOT  September -20  Corn futures  Trading Companies/ Banks /CBOT   51    (200)   (149)   -    (211,500)   bags 
Corn CBOT  August-21  Corn futures  Trading Companies/ Banks /CBOT   -    (257)   (257)   -    (254,011)   bags 
Fed Cattle BM&F  October-20  Fed cattle futures  BM&F   -    -    -    -    (54,450)   arroba 
Cotton  November -20  Cotton options  Trading Companies/ Banks /CBOT   -    (256)   (256)   -    (625)   ton. 
Cotton  November -21  Cotton options  Trading Companies/ Banks /CBOT   127    (258)   (131)   -    -    ton. 
Cotton  December-20  Cotton futures  Trading Companies/ Banks /CBOT   1,038    -    1,038    -    (893)   ton. 
Ethanol BM&F  August-20  Ethanol futures  BM&F   -    -    -    -    (150)   m³ 
Ethanol BM&F  September -20  Ethanol futures  BM&F   -    -    -    -    (450)   m³ 
Ethanol BM&F  October-20  Ethanol futures  BM&F   -    -    -    -    (150)   m³ 
                                        
      Current (bags)   2,068    (5,644)   (3,576)   -    (1,476,808)   bags 
      Current (arrobas)   -    -    -    -    (54,450)   arrobas 
      Current (tons)   1,038    (256)   782    -    (1,518)   tons 
      Current (cubic meters)   -    -    -    -    (750)   cubic meters 
      Non-current (bags)   178    (387)   (209)   -    (338,681)   bags 
      Non-current (tons)   127    (258)   (131)   -    -    tons 
                                        
      Total risk with commodities   3,411    (6,545)   (3,134)   -    (1,872,207)     
                                        
Interest R$  August-23  SWAP Pre-DI  Bradesco   1,257    -    1,257    11,847    -    BRL 
                                        
      Non-current   1,257    -    1,257    11,847    -    BRL 
      Total risk with interest   1,257    -    1,257    11,847    -    BRL 
                                        
      Total risks      5,911    (19,795)   (13,884)   (26,173)   (1,872,207)     
                                        
      Margin deposit   3,015    -    3,015                
                                        
         Current   7,180    (18,333)                    
         Non-current   1,746    (1,462)                    
         Result on June 30, 2020 (Note 25)   206,199    (254,367)                    

 

F-54

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

                    2019 
                    Volume / Position 
                             
Risk  Maturity  Outstanding
derivative
instruments		  Counterparty  Receivable   Payable   Total
Net balance		   Notional (’000)   Short (long) position   Unit 
Currency US$  August-19  Options  FC Stone   396    (182)   214    (4,000)   -    US$ 
Currency US$  August-19  Options  Olam   42    -    42    (500)   -    US$ 
Currency US$  March-20  Options  Itaú BBA   2,220    (1,536)   684    (14,000)   -    US$ 
Currency US$  July-19  NDF  Santander   7    -    7    (450)   -    US$ 
Currency US$  July-19  NDF  ABC   57    -    57    (370)   -    US$ 
Currency US$  July-19  NDF  Rabobank   -    (79)   (79)   (5,659)   -    US$ 
Currency US$  July-19  NDF  Itaú BBA   2    -    2    (250)   -    US$ 
Currency US$  July-19  NDF  Olam   -    (131)   (131)   (4,160)   -    US$ 
Currency US$  November-19  NDF  Itaú BBA   77    -    77    (10,000)   -    US$ 
Currency US$  November-19  NDF  Banco Safra   21    -    21    (2,500)   -    US$ 
                                        
      Current   2,822    (1,928)   894    (41,889)   -    US$ 
      Total currency risk   2,822    (1,928)   894    (41,889)   -    US$ 
Soybean CBOT  December-19  Soybean futures and accrual  Trading Companies/Banks/CBOT   428    (1,482)   (1,054)   -    (763,206)   bags 
Soybean CBOT  June-20  Soybean futures and accrual  Trading Companies/Banks/CBOT   -    (1,165)   (1,165)   -    (182,029)   bags 
Soybean CBOT  June-20  Soybean futures  Trading Companies/Banks/CBOT   76    -    76    -    (12,891)   bags 
Soybean CBOT  February-20  Soybean options fs  Trading Companies/Banks/CBOT   -    (4,091)   (4,091)   -    (861,786)   bags 
                            -           
Corn CBOT  August-19  Corn options  RJO Brien   -    (428)   (428)   -    (99,484)   bags 
Corn BM&F  September-19  Corn options  Itaú BBA   -    (246)   (246)   -    (83,250)   bags 
Corn BM&F  September-19  Corn options  BM&F   -    (659)   (659)   -    (249,750)   bags 
Corn CBOT  September-19  Corn futures  Trading Companies/Banks/CBOT   -    (457)   (457)   -    (84,667)   bags 
Corn CBOT  December-19  Corn futures and accrual  Trading Companies/Banks/CBOT   40    (426)   (386)   -    (217,361)   bags 
Corn CBOT  August-20  Corn futures and accrual  Trading Companies/Banks/CBOT   27    -    27    -    (33,970)   bags 
Fed Cattle BM&F  July-19  Fed cattle futures  BM&F   -    -    -         (3,630)   arroba 
Fed Cattle BM&F  September-19  Fed cattle futures  BM&F   -    -    -    -    (3,300)   arroba 
Fed Cattle BM&F  October-19  Fed cattle options  BM&F   -    (51)   (51)   -    (9,900)   arroba 
Fed Cattle BM&F  November-19  Fed cattle options  Itaú BBA   -    (38)   (38)   -    (6,600)   arroba 
                                        
Cotton  July-19  Cotton options  Trading Companies/Banks/CBOT   -    (84)   (84)   -    (1,473)   ton. 
Cotton  November-19  Cotton futures and accrual  Trading Companies/ Banks /CBOT   106    -    106    -    (89)   ton. 
Cotton  December-19  Cotton futures  Trading Companies/ Banks/CBOT   142    -    142    -    (112)   ton. 
                                        
Ethanol BM&F  July-19  Ethanol futures  BM&F   -    -    -    -    (600)   m³ 
Ethanol BM&F  August-19  Ethanol futures  BM&F   -    -    -    -    (600)   m³ 
Ethanol BM&F  September-19  Ethanol futures  BM&F   -    -    -    -    (300)   m³ 
                                        
      Current (bags)   544    (8,954)   (8,410)   -    (2,554,424)   bags 
      Current (arrobas)   -    (89)   (89)   -    (23,430)   arrobas 
      Current (tons)   248    (84)   164    -    (1,674)   tons 
      Current (cubic meters)                  -    (1,500)   cubic meters 
      Noncurrent (bags)   27    -    27    -    (33,970)   bags 
      Total risk with commodities   819    (9,127)   (8,308)   -    (2,614,998)     
Interest R$  August-23  SWAP Pre-DI  Bradesco   986    -    986    14,810         BRL 
      Current      -    -    -    -    -    BRL 
      Noncurrent   986    -    986    14,810    -    BRL 
      Total risk with interest   986    -    986    14,810    -    BRL 
      Total risks   4,627    (11,055)   (6,428)   (27,079)   (2,614,998)     
      Margin deposit   2,292    -    2,292                
         Current   5,906    (11,055)                    
         Noncurrent   1,013    -                     
         Result on June 30, 2019 (Note 23)   114,300    (98,617)                    

 

The Company uses derivative financial instruments such as forward currency contracts and forward commodities contracts to hedge against currency risk and commodities prices, respectively.

 

The margin deposits in operations with derivatives refer to the so-called margins by counterparties in operations with derivative instruments.

 

The total fair value of a derivative is classified as non-current assets or liabilities if the remaining maturity of the derivative is over 12 months, and as current assets or liabilities if the remaining maturity of the derivative is less than 12 months.

 

F-55

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

7. Accounts receivable and others

 

   Note  2020   2019 
Trade accounts receivable  7.1   145,692    112,646 
Recoverable taxes  7.2   9,305    5,950 
Advances to suppliers      20,609    5,790 
Other receivables      7,744    934 
Total current      183,350    125,320 
              
Trade accounts receivable  7.1   240,407    180,597 
Recoverable taxes  7.2   20,274    21,269 
Judicial deposits  27   1,706    1,667 
Total noncurrent      262,387    203,533 

 

7.1Trade accounts receivable

 

   2020   2019 
Sale of sugarcane   30,031    27,623 
Sale of grains   36,777    36,546 
Sale of beef cattle   636    1,210 
Leases of land   4,868    6,954 
Sale of machinery   918    121 
Sale of farms   73,678    41,351 
    146,908    113,805 
           
Allowance for expected credit losses   (1,216)   (1,159)
           
Total current   145,692    112,646 
           
Sale of machinery   333    - 
Sale of farms   240,074    180,597 
           
Total noncurrent   240,407    180,597 

 

a)Changes in the allowance for expected credit losses:

 

At June 30, 2018   866 
Accrual of provision   397 
Write-off or reversal   (104)
At June 30, 2019   1,159 
Set-up of provision   213 
Accrual of provision   3,782 
Write-off or reversal   (3,938)
At June 30, 2020   1,216 

  

F-56

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

b)Breakdown of receivable by maturity

 

   2020   2019 
Falling due:        
Up to 30 days   57,188    49,885 
31 to 90 days   44,424    24,456 
91 to 180 days   8,748    12,000 
181 to 360 days   34,954    20,555 
Over 360 days   240,407    180,597 
           
Past due:          
Up to 30 days   378    5,642 
31 to 90 days   -    108 
181 to 360 days   -    308 
Over 360 days   1,216    851 
    387,315    294,402 

  

c)Sale of sugarcane

 

The Company has two sugarcane supply agreements. The first agreement was with Brenco Companhia Brasileira de Energia Renovável and the second agreement is included in the partnership IV Agreement, as mentioned in the explanatory note on Commitments, whose credit risks are assessed in accordance with the internal policy as presented in Note 4.8b.

 

No expected credit allowance was noted at June 30, 2020, and there is no record of default until the date of disclosure of these Financial Statements.

 

d)Sale of grains

 

For the year ended June 30, 2020 and 2019, corn and soybean were sold mainly to the clients Cargill, Bunge Alimentos, Glencore and Gavilon, respectively.

 

e)Receivables from sales of farms

 

Total amounts sold, collected and receivables from sale of farms are as follows:

 

   Araucária III   Araucária IV   Araucária V   Jatobá I   Jatobá II   Jatobá III   Jatobá IV   Jatobá V   Alto Taquari I   Alto Taquari II   Alto Taquari III   Bananal IX   Total 
At June 30, 2018   8,527    9,017    50,594    8,657    -    -    -    -    -    -    -    -    76,795 
Sales   -    -    -    -    123,335    47,016    -    -    6,871    -    -    -    177,222 
Receipts   (2,980)   (1,525)   (10,115)   (2,513)   (21,000)   (5,000)   -    -    (2,927)   -    -    -    (46,060)
Fair value adjustment   (325)   (254)   (2,396)   38    16,488    115    -    -    325    -    -    -    13,991 
At June 30, 2019   5,222    7,238    38,083    6,182    118,823    42,131    -    -    4,269    -    -    -    221,948 
Sales (a)   -    -    -    -    -    -    18,974    37,919    -    3,576    11,037    -    71,506 
Receipts   (4,547)   -    (8,980)   (4,680)   (18,359)   (5,008)   (6,731)   (5,000)   (1,659)   (2,046)   (1,761)   -    (58,771)
Acquisition of Agrifirma   -    -    -    -    -    -    -    -    -    -    -    21,272    21,272 
Fair value adjustment   2,661    20    8,401    1,067    29,277    10,261    3,238    110    935    2,024    (1,330)   1,133    57,797 
At June 30, 2020   3,336    7,258    37,504    2,569    129,741    47,384    15,481    33,029    3,545    3,554    7,946    22,405    313,752 
                                                                  
Current   3,131    4,728    10,596    2,569    22,690    8,140    3,325    8,541    930    1,200    614    7,214    73,678 
Noncurrent   205    2,530    26,908    -    107,051    39,244    12,156    24,488    2,615    2,354    7,332    15,191    240,074 

 

(a)Information on sales and the amounts received in the fiscal year ended June 30, 2020 is presented in Notes 1.2 and 21.b.

 

F-57

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Variable consideration

 

In the case of sales for which official measurement during or upon termination of the agreement is mandatory, the Company adopts the variable consideration concept set forth in IFRS 15 – Revenue and does not recognize 2.3% of the sale until the measurement is made. This percentage, whose calculation is based on the highest historical deviation plus a safety margin, represents the risk of proportional reversion upon sale recognition if there is any difference between the area negotiated and the area delivered. The Company has never delivered a narrower area than the negotiated area and recognizes the 2.3% of revenue from sale after the official measurement.

 

The following table provides a breakdown of credits with the variable consideration element:

 

   Jatobá II   Jatobá III   Jatobá IV   Jatobá V   Alto Taquari I   2020 
June 30, 2020   129,741    47,384    15,481    33,029    3,545    229,180 
Variable consideration (2.3%)   3,054    1,115    364    778    83    5,394 
    132,795    48,499    15,845    33,807    3,628    234,574 

 

7.2Recoverable taxes

 

   2020   2019 
Withholding income tax (IRRF) on financial investments to be offset   3,508    3,276 
Income tax losses and social contribution carryforwards   3,155    - 
Other recoverable taxes and contributions   977    601 
Tax on value added - IVA – (Paraguay)   1,665    2,073 
Total current   9,305    5,950 
           
ICMS recoverable   9,786    9,792 
ICMS recoverable on property, plant and equipment   83    194 
Non-cumulative PIS and COFINS to be offset   1,486    4,804 
IRRF on financial investments to be offset   454    2,409 
Tax on value added - IVA – (Paraguay)   8,465    4,070 
Total noncurrent   20,274    21,269 

 

F-58

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

8.Inventories

 

   2020   2019 
Soybean   68,975    54,581 
Corn   37,223    11,116 
Bean   3,279    - 
Cotton   3,500    4,349 
Other harvests   340    255 
Agricultural products   113,317    70,301 
           
Raw materials   25,461    26,767 
    138,778    97,068 

 

8.1Adjustment to recoverable value of inventories of agricultural products

 

At June 30, 2018   (4)
Adjustment to recoverable value of agricultural products, net   (2,040)
Realization as cost of sales   1,773 
At June 30, 2019   (271)
Adjustment to  recoverable value of agricultural products, net   (4,153)
Realization as cost of sales   1,763 
At June 30, 2020   (2,661)

 

9.Biological assets

 

   2020   2019 
Food cattle   9,037    13,887 
Production cattle   25,444    23,235 
Grain plantation   20,749    12,860 
Cotton plantation   13,724    8,606 
Sugarcane plantation   72,043    64,528 
Total   140,997    123,116 
           
Current   115,553    99,881 
Noncurrent   25,444    23,235 

 

F-59

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The amounts of expenditures with plantation and tilling of crops are substantially represented by expenditures with the formation of harvest such as: seeds, fertilizers, pesticides, depreciation and manpowers used in the crops.

 

The area (hectares) to be harvested corresponding to the biological assets is as follows:

 

   Planted area (Hectares) 
   2020   2019 
Grains   9,836    8,766 
Cotton   1,404    976 
Sugarcane (i)   26,959    27,843 
    38,199    37,585 

 

(i)For sugarcane the area considered above refers to the total to be harvested in all the future cuts, considered in the cash flow for calculation of fair value of biological assets. This area includes the hectares leased from Brenco and Partnership IV, according to contracts executed on May 8, 2015 and February 7, 2017, respectively.

 

Changes in agricultural activity

 

   Grains   Cotton   Sugarcane 
At June 30, 2018   2,203    -    59,790 
                
Expenditures with plantation   173,367    13,323    - 
Expenditures with tilling   -    -    123,230 
Fair value variation   18,062    2,619    34,511 
Harvest of agricultural produce   (181,411)   (7,336)   (153,003)
Effect of conversion   639    -    - 
                
At June 30, 2019   12,860    8,606    64,528 
                
Expenditures with plantation   208,934    13,702    - 
Biological assets due to the acquisition of Agrifirma (Note 1.1)   4,883    -    - 
Expenditures with tilling   -    -    144,177 
Fair value variation   84,435    1,373    75,861 
Harvest of agricultural produce   (291,798)   (9,957)   (212,523)
Effect of conversion   1,435    -    - 
                
At June 30, 2020   20,749    13,724    72,043 

 

F-60

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Changes in cattle raising activity

 

   Heads
of cattle
(in number)		   Cattle for
production		 
At June 30, 2018   20,993    34,053 
           
Acquisition/birth costs   8,981    7,917 
Handling costs   -    11,955 
Sales   (8,750)   (17,668)
Deaths   (357)   (581)
Consumption   (2)   (5)
Effect of conversion   -    (75)
Change in fair value   -    1,526 
At June 30, 2019   20,865    37,122 
           
Acquisition/birth costs   9,767    9,964 
Handling costs   -    18,158 
Sales   (15,159)   (33,230)
Deaths   (409)   (685)
Effect of conversion   -    4,450 
Change in fair value   -    (1,298)
At June 30, 2020   15,064    34,481 

 

Quantitative data about cattle raising activity, expressed in heads of cattle

 

   Consumable
cattle		   Production
cattle		 
At June 30, 2019   4,896    15,969 
At June 30, 2020   2,624    12,440 

 

Fair value hierarchy at June 30, 2020

 

   Amount   Fair value
Sugarcane   72,043    Level 3
Cattle   34,481    Level 2
Grains   20,749    Level 3
Cotton   13,724   Level 3

 

The significant non-observable inputs used in the measurement of the fair value of sugarcane, grains and cotton classified as Level 3 in the fair value hierarchy, along with an analysis of quantitative sensitivity on June 30, 2020, are as follows. There were no reclassifications among the levels during the year.

  

Description   Evaluation
method		   Significant
non-observable
inputs		   Variation of non-
observable inputs		   Increase in inputs   Sensitivity of inputs to fair value
Decrease in inputs
Sugarcane   Discounted cash flow   - Yield   Yield: 45,0 to 118,5 tons per hectare.   An increase in yield generates a positive result in the fair value of biological assets.   A decrease in yield generates a negative result in the fair value of biological assets.
        - TRS (Kg of sugar per ton of sugarcane)   Total recoverable sugar: (TRS) 137 to 143 per ton of cane   An increase in TRS generates a positive result in the fair value of biological assets.   A decrease in TRS generates a negative result in the fair value of biological assets.
Corn   Discounted cash flow   - Yield   Yield: 60 to 115 tons per hectare.   An increase in yield generates a positive result in the fair value of biological assets.   A decrease in yield generates a negative result in the fair value of biological assets.
Cotton   Discounted cash flow   - Yield   Yield: 4,2 tons per hectare.   An increase in yield generates a positive result in the fair value of biological assets.   A decrease in yield generates a negative result in the fair value of biological assets.

  

F-61

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Changes in fair value in the statement of income

 

   2020   2019   2018 
Grains   84,435    18,062    54,892 
Cotton   1,373    2,619    - 
Sugarcane   75,861    34,511    43,952 
Cattle   (1,298)   1,526    239 
    160,371    56,718    99,083 

 

10.Investment properties

 

   Land – Farms   Buildings and improvements   Opening of area   Total in operation   Construction in progress   2019 
Opening balance   425,079    32,252    49,474    506,805    50,347    557,152 
Acquisitions   718    92    408    1,218    26,993    28,211 
Disposals   (14,416)   (2,098)   (10,662)   (27,176)   (765)   (27,941)
Transfers   -    10,641    45,726    56,367    (56,297)   70 
(-) Depreciation / amortization   -    (1,268)   (6,373)   (7,641)   -    (7,641)
Effect of conversion   (820)   39    259    (522)   (612)   (1,134)
Net book balance   410,561    39,658    78,832    529,051    19,666    548,717 
                               
At June 30, 2019                              
Total cost   410,561    48,599    181,128    640,288    19,666    659,954 
Accumulated depreciation   -    (8,941)   (102,296)   (111,237)   -    (111,237)
Net book balance   410,561    39,658    78,832    529,051    19,666    548,717 
                               
Annual depreciation rates (weighted average) - %        4-20    10-20                

 

   Land – Farms   Buildings and improvements   Opening of area   Total in operation   Construction in progress   2020 
Opening balance   410,561    39,658    78,832    529,051    19,666    548,717 
Acquisitions   24,861    197    445    25,503    16,029    41,532 
Acquisitions – business combinations   197,710    7,906    -    205,616    -    205,616 
Disposals   (4,199)   (301)   (1,559)   (6,059)   -    (6,059)
Transfers   -    6,469    12,528    18,997    (18,997)   - 
(-) Depreciation / amortization   -    (1,830)   (8,257)   (10,087)   -    (10,087)
Effect of conversion   57,118    4,896    22,544    84,558    (6,016)   78,542 
                               
Net book balance   686,051    56,995    104,533    847,579    10,682    858,261 
                               
At June 30, 2020                              
Total cost   686,051    69,276    177,255    932,582    10,682    943,264 
Accumulated depreciation   -    (12,281)   (72,722)   (85,003)   -    (85,003)
Net book balance   686,051    56,995    104,533    847,579    10,682    858,261 
                               
Annual depreciation rates (weighted average) - %        4-20    05-20                

 

Four farms owned by the Company are held as guarantee for loans and financing according to Note 15, representing 30% of total investment properties.

 

F-62

 

   

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The table below shows the fair value of investment properties are as follows:

 

      Hectares         Fair value*   Cost value** 
Farm  State  2020   2019   Real estate  Acquisition  2020   2019   2020   2019 
Jatobá  Bahia   14,930    18,073   Jaborandi Ltda  Mar-07   242,504    231,646    28,352    33,930 
Alto Taquari  Mato Grosso   5,103    5,291   Mogno Ltda  Aug-07   194,504    174,580    33,259    35,247 
Araucária  Goiás   5,534    5,534   Araucária Ltda  Apr-07   190,276    163,008    45,488    44,672 
Chaparral  Bahia   37,182    37,182   Cajueiro Ltda  Nov-07   417,660    373,014    89,558    87,909 
Nova Buriti  Minas Gerais   24,212    24,212   Flamboyant Ltda  Dec-07   35,313    35,822    23,454    23,466 
Preferência  Bahia   17,799    17,799   Cajueiro Ltda  Sep-08   68,160    65,172    27,067    27,385 
São José  Maranhão   17,566    17,566   Ceibo Ltda  Feb-17   247,572    211,988    110,443    110,157 
Moroti  Boqueron Paraguay   59,585    59,490   Agropecuaria Moroti S/A  Feb-18   235,270    216,018    232,976    164,190 
Arrojadinho Farm  Bahia   16,642    -   Agrifirma Agro Ltda.  Jan-20   88,482    -    84,825    - 
Rio do Meio Farm  Bahia   12,288    -   Agrifirma Agro Ltda.  Jan-20   122,687    -    120,791    - 
Serra Grande Farm  Piaui   4,489    -   Imobiliaria Cremaq  May-20   30,273    -    26,091    - 
       215,330    185,147          1,872,701    1,471,248    822,304    526,956 

 

(*)The fair value of the investment property on June 30, 2020 was R$1,872,701 (R$1,471,248 June 30, 2019). The fair value was determined based on a comparative market approach and was prepared by the Company’s specialists. The comparable sales value of investment properties is adjusted considering the specific aspects of each property, where the price per hectare is the most relevant assumption. The fair value presented is considered as level 3 in the fair value hierarchy and there were no reclassifications among levels in the year.
(**)At June 30, 2020 the cost value of R$822,304 (R$526,956 at June 30, 2019) is not comparable to that disclosed in the “Investment properties” note, since the note contemplates investments made in certain partnerships (leased farms), which are not an integral part of the Company’s portfolio of owned farms.

 

11. Investments

 

a)Changes in investments

 

   2019   Acquisition   Equity pickup   Effect from conversion   2020 
Cresca   1,256    -    (150)   509    1,615 
Agrofy   -    4,127    -    -    4,127 
    1,256    4,127    (150)   509    5,742 

 

   2018   Capital increase (reduction)   Equity pickup   Effect from conversion   2019 
Cresca   86    49    1,102    19    1,256 
    86    49    1,102    19    1,256 

 

F-63

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

b)Interest in Joint Venture

 

Cresca’s summarized financial information, based on the financial statements prepared in accordance with IFRS as of and for years ended June 30, 2020 and 2019, and the reconciliation with the book value of the investment in the consolidated financial statements are presented below at the fair value adjustment on the acquisition date:

 

   2020   2019 
Assets   3,489    2,876 
Current   3,447    2,865 
Cash and cash equivalents   175    349 
Accounts receivable, inventories and other receivables   3,272    2,516 
Noncurrent   42    11 
Other noncurrent   42    11 
           
Liabilities   260    365 
Current   260    365 
Trade payables, taxes and loans   260    365 
Total net assets   3,229    2,511 
Company’s interest – 50%   50%   50%
Company’s interest in net assets at estimated fair value   1,615    1,256 
           

 

   2020   2019 
Revenue   -    3 
Cost of products sold   -    (6)
Gross revenue (expenses)   -    (3)
Selling expenses   -    (43)
Administrative expenses   (28)   (235)
Other profit/expenses   -    (72)
Finance costs   (272)   (101)
Loss before tax   (300)   (454)
Income and social contribution taxes   -    2,658 
Loss for the year   (300)   2,204 
Company’s interest – 50%   (150)   1,102 
Equity method   (150)   1,102 

 

F-64

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

12. Property, plant and equipment

  

   Buildings and
improvements		   Equipment
and facilities		   Agricultural
vehicles and
machinery		   Furniture
and fixtures		   Total in
operation		   Construction
in progress		   Sugarcane   Total
property,
plant and
equipment		 
At July 1, 2018                                
Opening balance   197    6,973    10,995    762    18,927    111    65,792    84,830 
Acquisitions   2    7,835    1,850    453    10,140    289    32,609    43,038 
Disposals   -    (94)   (322)   (17)   (433)   -    -    (433)
Transfers   -    330    -    -    330    (400)   -    (70)
Depreciation   (88)   (1,270)   (1,480)   (154)   (2,992)   -    (16,500)   (19,492)
Translation gains/losses   -    -    (21)   -    (21)   -    -    (21)
Accounting balance, net   111    13,774    11,022    1,044    25,951    -    81,901    107,852 
At July 1, 2019                                        
Total cost   933    19,162    26,732    2,057    48,884    -    130,516    179,400 
Accumulated depreciation   (822)   (5,388)   (15,710)   (1,013)   (22,933)   -    (48,615)   (71,548)
Accounting balance, net   111    13,774    11,022    1,044    25,951    -    81,901    107,852 
At June 30, 2020                                        
Opening balance   111    13,774    11,022    1,044    25,951    -    81,901    107,852 
Acquisitions   -    1,391    2,519    238    4,148    96    20,508    24,752 
Acquisitions – business combination   -    -    14,279    1,356    15,635    -    -    15,635 
Disposals   -    (115)   (4,968)   (10)   (5,093)   -    -    (5,093)
Transfers   108    92    -    -    200    (96)   (104)   - 
Depreciation   (47)   (1,817)   (5,294)   (235)   (7,393)   -    (20,740)   (28,133)
Translation gains/losses   -    87    776    49    912    -    -    912 
Accounting balance, net   172    13,412    18,334    2,442    34,360    -    81,565    115,925 
At June 30, 2020                                        
Total cost   1,041    19,540    46,668    4,065    71,314    -    152,403    223,717 
Accumulated depreciation   (869)   (6,128)   (28,334)   (1,623)   (36,954)   -    (70,838)   (107,792)
Accounting balance, net   172    13,412    18,334    2,442    34,360    -    81,565    115,925 
Annual depreciation rates (weighted average) - %   2-25    10    13-20    10              16-27      

 

F-65

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

13. Right-of-use of assets

 

   Land – Farms   Buildings and improvements   Vehicles and Agricultural Machinery   Total Right-of-use of assets 
At June 30, 2020                
First-time adoption   87,209    538    5,047    92,794 
New contracts   28,365    -    601    28,966 
Adjustments   6,873    331    (2,511)   4,693 
(-) Depreciation / Amortization   (23,335)   (580)   (1,723)   (25,638)
Excgange rate variation   251    3    24    278 
Ending balance, net   99,363    292    1,438    101,093 
At June 30, 2020                    
Total cost   122,698    872    3,161    126,731 
Cumulative depreciation   (23,335)   (580)   (1,723)   (25,638)
Ending balance, net   99,363    292    1,438    101,093 
Annual depreciation rates (weighted average) - %   10-25    50    50      

 

14. Leases payable

 

   Nature  2020   2019 
Current           
Financial lease sugarcane fields  Parceria III   287    254 
Operating leases      -    26,249 
Operating leases - IFRS 16      25,562    - 
       25,849    26,503 
Non-current             
Financial lease sugarcane fields  Parceria IV   34,011    20,943 
Operating leases - IFRS 16  -   92,503    - 
       126,514    20,943 
       152,363    47,446 

 

Changes in financial leases during the year ended June 30, 2020 and 2019 are as follows:

 

   2019 (a)   First-time adoption - IFRS 16   Exchange rate variation   Unwind of present value adjustment   Payments   New contracts   2020 
Financial lease sugarcane fields - Parceria III   254    -    -    33    -    -    287 
Financial lease sugarcane fields - Parceria IV   20,943    -    -    13,068    -    -    34,011 
Operating leases   7,156    -    -    -    (13,006)   5,850    - 
Operating leases - IFRS 16   19,093    92,794    307    13,912    (37,007)   28,966    118,065 
    47,446    92,794    307    27,013    (50,013)   34,816    152,363 

 

(a)As reclassified according to note 2.1

 

As of June 30, 2020, the Company’s main contracts subject to IFRS 16 are related to agricultural partnership and land lease operations, as well as other less relevant contracts that involve leases of machinery, vehicles and properties.

 

Changes in lease liabilities occur upon effective payment of the lease as well as periodic restatement by variation in the soybean or sugarcane price and adjustment to present value. The impacts from adjustment to present value are recognized under financial income (loss), net in the income statement.

 

F-66

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

As of June 30, 2020, the Company and its subsidiaries held the following lease agreements from third parties:

 

Lease liabilities

 

Description  Location  Currency  2020 
Parceria II  Ribeiro Gonçalves - PI  R$   14,390 
Parceria III  Alto Taquari - MT  R$   35,167 
Parceria III – Sugarcane plantation lease  Alto Taquari  R$   287 
Parceria IV - Sugarcane plantation lease  São Raimundo de Mangabeira  R$   34,011 
Parceria V  São Félix do Xingu - MT  R$   36,492 
Araucária  Mineiros - GO  R$   2,271 
Parceria VII  Baixa Grande do Ribeiro - PI  R$   26,697 
Headquarters  São Paulo - SP  R$   181 
Vehicle lease  N.A.  R$   549 
Services with identified assets  N.A.  R$   1,840 
Lease of vehicles and office in Paraguay  Assunção - Paraguai  R$   478 
      R$   152,363 

 

The above lease liabilities, which are under IFRS 16, are discounted to present value using an incremental borrowing rate that ranges from 4.82% to 6.91%.

 

The lease agreements with third parties of the Company are indexed to the price of the soybean bag in the region where each unit is located, except for Parceria III and Headquarters, where the price is determined via Consecana and fixed payments, respectively. For the cases where payments are indexed to the soybean bag, future minimum payments are estimated in number of soybean bags and translated into local currency using the soybean price of each region, on the base date of first-time adoption of IFRS 16, and adjusted to the current price at time of payment. Meanwhile, payments indexed to Consecana are determined in tons of sugarcane and translated into local currency based on the Consecana price in effect at the time.

 

With regard to the lease agreements of third parties:

 

  (i) they contain no contingent payment clause;
  (ii) the lease agreements of Parceria II, V and Araucária are, for the most part, indexed to the variation in the soybean bag price, and, in the case of Parceria II, there is a clause for adjustment of payment for yield bonus;
  (iii) there are no restrictions imposed, such as those related to dividends and interest on equity, additional debt or any other that requires additional disclosure.

 

F-67

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The future minimum lease payments of the aforementioned leases are detailed below:

 

1 year   25,849 
2 years   26,200 
3 years   17,674 
4 years   16,381 
5 years   11,275 
Above 5 years   54,984 
    152,363 

 

15. Trade accounts payable and others

 

   Note  2020   2019 
Trade accounts payable  15.1   55,603    37,710 
Taxes payable      12,396    7,443 
Dividends payable      28,394    42,060 
Advances to customers      10,249    5,707 
Other liabilities      4,528    34 
Total current      111,170    92,954 
              
Taxes payable      25,770    19,451 
       2,232    - 
Total noncurrent      28,002    19,451 

 

15.1 Trade accounts payable

 

At June 30, 2020, the Company’s balance of trade accounts payable is as follows:

 

   2020   2019 
Raw materials and services   55,603    37,710 
    55,603    37,710 

F-68

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

16. Loans, financing and debentures

  

      Annual interest rates and charges - %    
   Index  2020  2019   2020   2019 
Financing for agricultural costs                  
   Fixed rate + CDI  1.80% + 100%   -    40,568    - 
   Fixed rate  -   7.00%   -    6,293 
   Fixed rate  3.90%   -    9,072    - 
   Fixed rate  6.30%   -    108,057    - 
   Fixed rate  6.34%   -    3,251    - 
   Fixed rate  -   6.14%   -    32,295 
   Fixed rate  7.64%   -    9,076    - 
               170,024    38,588 
Financing for agricultural costs (USD)                     
   Fixed rate  7.00%   -    2,787    - 
   Fixed rate  8.50%   -    5,573    - 
               8,360    - 
Financing for agricultural costs (PYG)                     
   Fixed rate  8.00%   -    7,940    - 
   Fixed rate  8.25%   8.25%   19,749    18,364 
               27,689    18,364 
Bahia Project Financing                     
   Fixed rate  3.50%   3.50%   10,023    9,612 
   Fixed rate  -   4.00%   -    2,668 
   Fixed rate  6.50%   6.50%   66    198 
   Fixed rate  7.50%   7.50%   165    497 
   Fixed rate  -   9.00%   -    15,559 
               10,254    28,534 
Financing of working capital                     
   Fixed rate + CDI  2% + 100%   -    77,516    - 
               77,516    - 
Financing of Machinery and Equipment – FINAME                     
   Fixed rate  7.22%   7.22%   230    321 
   Fixed rate + TJLP  -   3.73%   -    1,285 
   Fixed rate  -   8.50%   -    2,204 
   Fixed rate  -   10.50%   -    1,732 
               230    5,542 
Financing of sugarcane                     
   Fixed rate  6.76%   6.76%   2,447    2,863 
   Fixed rate  6.14%   -    40,857    27,580 
   Fixed rate  6.34%   -    29,986    - 
   Fixed rate + TJLP  -   3.80%   -    10,948 
   Fixed rate  -   10.00%   -    2,091 
               73,290    43,482 
Debentures                     
   CDI  106.50%   106.50%   88,884    91,518 
   CDI  110.00%   110.00%   59,548    61,371 
               148,432    152,889 
(-) Transaction costs              (1,682)   (1,546)
               514,113    285,853 
                      
Current              217,274    76,608 
Non-current              296,839    209,245 

 

Keys:

 

TJLP – Long Term Interest Rate

FINAME – Financing of Machinery and Equipment (National Bank for Economic and Social Development - BNDES)

BNB – Banco do Nordeste

PYG – Paraguayan currency (Guarani)

F-69

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Breakdown of debt by index

 

   2020   2019 
Fixed rate   247,597    120,731 
CDI   266,516    152,889 
TJLP   -    12,233 
    514,113    285,853 

 

Maturities of short- and long-term loans and financing are broken down as follows:

 

   2020   2019 
1 year   217,274    76,608 
2 years   198,793    78,326 
3 years   51,670    51,283 
4 years   22,098    50,909 
5 years   8,269    21,999 
Above 5 years   16,009    6,728 
    514,113    285,853 

 

Changes in loans and financing during the year ended June 30, 2020 and 2019 are as follows:

 

   2018   Acquisition
Agrifirma		   Contracting   Payment of principal   Payment Interest   Appropriation of interest   Foreign exchange variation   2019 
Agricultural Cost Financing (Reais)   31,847         -    37,523    (32,148)   -    1,366    -    38,588 
Agricultural Cost Financing (PYG)   11,486    -    22,838    (15,046)   (1,297)   1,365    (982)   18,364 
Bahia Project Financing (*)   30,277    -    -    (3,018)   (318)   1,593    -    28,534 
Financing of Machinery and Equipment – FINAME   6,041    -    -    (479)   (560)   538    2    5,542 
Sugarcane Financing   34,512    -    30,233    (22,487)   (1,862)   3,086    -    43,482 
Debentures   143,108    -    -    -    -    9,781    -    152,889 
Transaction costs   (1,467)   -    -    -    -    (79)        (1,546)
    255,804    -    90,594    (73,178)   (4,037)   17,650    (980)   285,853 

 

    2019    Acquisition Agrifirma    Contracting    Payment of principal    Payment Interest    Appropriation of interest    Foreign exchange variation    2020 
Agricultural Cost Financing (Reais)   38,588      -    166,346    (38,185)   (1,848)   5,123    -    170,024 
Agricultural Cost Financing (PYG)   18,364    -    14,181    (4,017)   (1,020)   2,007    6,534    36,049 
Bahia Project Financing (*)   28,534    -    -    (16,953)   (2,864)   1,537    -    10,254 
Working Capital Financing   -    123,862    77,000    (63,777)   (65,980)   3,369    3,042    77,516 
Financing of Machinery and Equipment – FINAME   5,542    -    -    (5,346)   (481)   433    82    230 
Sugarcane Financing   43,482    -    43,482    (15,689)   (2,194)   4,208    1    73,290 
Debentures   152,889    -    -    -    (11,626)   7,169    -    148,432 
Transaction costs   (1,546)   -    -    -    -    (136)   -    (1,682)
    285,853    123,862    301,009    (143,967)   (86,013)   23,710    9,659    514,113 

 

(*)Financing to raise funds for opening of areas and improvements in Jatobá and Chaparral farms.

 

F-70

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

a)Loans and Financing

 

Covenants

 

All loans and financing contracts above are in Reais and have specific terms and conditions defined in the respective contracts with governmental economic and development agencies that directly or indirectly grant those loans. At June 30, 2020 and June 30, 2019 the Company’s financial agreements did not require compliance with financial covenants, but rather only operating covenants, on which the Company is in compliance.

 

b)Debentures

 

On May 25, 2018, one hundred forty-two thousand, two hundred (142,200) non-convertible debentures were subscribed to and paid in, with security interest, in the total of R$142,200 (R$85,200 for the first series and R$57,000 for the second series).

 

The maturity date of the first-series debentures is August 1, 2022 (“maturity date of the first series”) and their unit face value will be paid in three (3) annual installments, the first on July 30, 2020 and the final on the maturity date of the first series. Compensatory interest corresponding to one hundred six point fifty percent (106.50%) of the DI rate will be accrued on the unit face value of first-series debentures, which will be paid on July 30 of each year or on the maturity date of the first series. The maturity date of the second-series debentures is July 31, 2023 (“maturity date of the second series”) and their unit face value will be paid in four (4) annual installments, the first on July 30, 2020 and the final on the maturity date of the second series. Compensatory interest corresponding to one hundred ten percent (110.00%) of the overnight DI rate will be accrued on the unit face value of second-series debentures, which will be paid on July 30 of each year or on the maturity date of the second series.

 

The Debentures were linked to a securitization transaction, serving as guarantee for the issue of Certificates of Agribusiness Receivables (“CRA”) pursuant to Law 11,076/2004 and CVM Instruction 414/2004, which were the object of a public distribution offer with restricted efforts, under CVM Instruction 476/2009 (“Restricted Offer”).

 

The Debentures are backed by security interest in the form of fiduciary sale of properties owned by the Company and registered under no. 6,254, 6,267 and 6,405, all of them at the Property Records Office of Correntina in the state of Bahia.

 

Covenants

 

The debentures have covenants related to the maintenance of certain financial indicators, based on the ratio of net debt to fair value of investment properties. Failure by the Company to attain these indicators during the term of the debentures may entail advance maturity of the debt.

 

As of June 30, 2020, the Company is in compliance with the covenants described above.

 

F-71

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

17. Income and social contribution taxes

 

17.1. Deferred taxes

 

Deferred income and social contribution tax assets and liabilities are offset when there is a legal right to offset tax credits against tax liabilities, and provided that they refer to the same tax authority and the same legal entity.

 

The fiscal year for income tax and social contribution calculation purposes is different from that adopted by the Company for the preparation of its consolidated financial statements, which ends June 30 of each year.

 

Deferred income tax and social contribution tax assets and liabilities as of June 30, 2020 and 2019 are as follows:

 

   2020   2019 
Assets        
Noncurrent        
Tax loss carryforwards (NOL)   63,066    54,555 
Biological assets   1,389    6,275 
Financial lease   13,886    3,443 
Contingency, bonuses and fair value   4,794    9,374 
Derivative financial instruments   4,720    2,185 
Allowance for expected credit losses   890    488 
Difference in cost of farms   170    170 
Provision of other accounts payable and receivable   2,550    2,468 
Subscription warrant   358    - 
    91,823    78,958 
Liabilities          
Noncurrent          
Biological assets   27,735    11,546 
Finance lease   -    58 
Surplus on investment   1,733    1,733 
Costs of transactions   570    526 
Provision of residual value and useful life of PPE assets   981    1,880 
Accelerated depreciation of assets for rural activity   44,606    42,705 
Deferred taxes on surplus value of PPE and investment property – Acquisition of  Agrifirma   26,947    - 
    102,572    58,448 
Deferred assets, net   23,282    20,510 
Deferred liabilities, net   (34,031)   - 
Net balance   (10,749)   20,510 

 

F-72

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The net change in deferred income tax is as follows:

 

At June 30, 2018   32,742 
Tax losses   11,113 
Adjustments in biological assets and agricultural products   2,173 
Financial lease   1,830 
Provisions for contingency and fair value   1,823 
Derivative financial instruments   1,821 
Costs of transactions   (27)
Allowance for doubtful accounts   (180)
Provision for other accounts payable and receivable   674 
Accelerated depreciation of assets for rural activity   (31,459)
At June 30, 2019   20,510 
Tax losses   8,511 
Adjustments in biological assets and agricultural products   (21,075)
Financial lease   10,501 
Provisions for contingency and fair value   (4,580)
Derivative financial instruments   2,535 
Costs of transactions   (44)
Allowance for doubtful accounts   402 
Provision for other accounts payable and receivable   82 
Accelerated depreciation of assets for rural activity   (1,002)
Subscription warrant   358 
Deferred taxes on surplus value of PPE and investment property – Acquisition of Agrifirma (Note 1.1)   (27,731)
Realization of deferred taxes on surplus value of PPE and investment property – Acquisition of Agrifirma   784 
      
At June 30, 2020   (10,749)

 

The expected realization of deferred tax assets are as follows:

 

   2020 
2021   44,890 
2022   9,333 
2023   4,188 
2024   4,255 
2025 to 2030   29,157 
    91,823 

 

F-73

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

17.2. Income and social contribution tax expenses

 

   2020   2019   2018 
Income before income and social contribution taxes   133,529    199,798    152,257 
Combined nominal rate of income tax and social contribution taxes – %   34%   34%   34%
    (45,400)   (67,931)   (51,767)
                
Share of loss in a Joint Venture   (51)   375    4,988 
Management bonus   (2,411)   (2,827)   (2,331)
Share-based incentive plan - ILPA   126    (232)   (208)
Nondeductible expenses   -    (126)   (135)
Profit or loss of joint venture abroad   (1,070)   (2,618)   - 
Net effect of subsidiaries taxed whose profit is computed as a percentage of gross revenue (*)   35,999    51,126    19,121 
Net effect of re-distribution of the assets and liabilitiesof joint venture abroad (Note 1.6)   -    -    4,778 
Other permanent addition   (1,168)   (486)   (365)
                
                
Income and social contribution taxes for the year   (13,975)   (22,719)   (25,919)
                
Current   (10,447)   (10,487)   (4,875)
Deferred   (3,528)   (12,232)   (21,044)
                
    (13,975)   (22,719)   (25,919)
Effective tax rate   -10%   -11%   -17%

 

(*)For some of our real estate subsidiaries, profit tax is measured based on the regime whereby profit is computed as a percentage of gross revenue, i.e., income tax is determined on a simplified base to calculate the taxable profit (32% for lease revenues, 8% for sale of farms and 100% for other earnings). This results effectively in taxing the profit of subsidiaries at a rate lower than if taxable income were based on accounting records.

 

F-74

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

18. Other liabilities

 

   2020 
Accounts payable for acquisition of Serra Grande Farm (a)   14,263 
Variable consideration for acquisition of Agrifirma (b)   25,128 
    39,391 
      
Current   5,017 
Non-current   34,374 

  

  a) On April 20, 2020, the Company acquired 4,489 hectares of Serra Grande Farm for R$25,047. On June 30, 2020, the liability mainly refers to the delivery of 162,000 bags of soybean in three annual installments of 54,000 bags each. The Company maintains its liability measured at fair value through profit or loss.

 

b)The consideration transferred in exchange for control of Agrifirma is divided into four classes, classified in the financial statement in accordance with their characteristics. Restricted shares, Agrifirma Warrants and Agrifirma Warrant Dividends, given their variation factor, were classified as financial liability and are measured at fair value through profit or loss. The impact of this variation in profit or loss on June 30, 2020 was R$1,053.

 

On June 30, 2019, there were no outstanding balances under Other liabilities.

 

The maturities of accounts payable due to acquisition of Serra Grande Farm are broken down as follows:

 

   2020 
     
1 year   5,017 
2 years   4,649 
3 years   4,597 
    14,263 

 

19. Equity

 

a)Capital (number of shares)

 

Shareholder  2020   2019 
Cresud S.A.C.I.F.Y.A.   19,910,800    23,291,500 
Board of Directors   192,800    8,462,700 
Executive Board   263,453    131,267 
Officers   456,253    8,593,967 
Treasury   2,761,820    3,086,748 
Other   38,975,428    21,916,701 
Total shares of paid-up capital   62,104,301    56,888,916 
Total free float shares   38,975,428    21,916,701 
Free float shares as percentage of total shares (%)   63    39 

 

F-75

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

At June 30, 2020, the Company’s subscribed and paid-up capital amounted to R$699,811 (R$584,224 at June 30, 2019). The Company is authorized to increase its capital, regardless of amendments to the articles of incorporation, up to the limit of R$3,000,000, as determined by the Board of Directors.

 

b)Capital reserve

  

Capital Reserves are composed of amounts received by the company that are not registered under profit or loss as revenue, since they refer to amounts allocated to capital reinforcement, which did not involve any effort from the company in delivering the goods or services.

 

Additional paid in capital

 

The reserve recorded on June 30, 2020 is related to the acquisition of the subsidiary Agrifirma on January 27, 2020 (Note 1.1), a transaction conducted via exchange of shares that generated a difference between the amount of the capital increase and the consideration transferred related to the unrestricted shares, as shown below:

 

   Number of
shares		   Amount 
Unrestricted shares   4,402,404    97,569 
Restricted shares(*)   812,981    18,018 
Shares issued in the initial exchange ratio / Capital increase   5,215,385    115,587 
           
Unrestricted shares (final exchange ratio)   4,044,654    82,021 
           
Additional paid in capital        (33,566)

  

(*)Shares with restrictions on sale do not meet the definition of equity instruments and are registered as financial liabilities.

 

Share-based compensation

 

The information on the share-based compensation plan is described in Note 23.

 

c)Income reserves

 

Legal reserve

 

Pursuant to article 193 of Law No. 6404/76 and article 36, item (a), 5% (five per cent) of the Company’s net income at the end of each year must, before any other allocation, be used to set up a legal reserve, which shall not exceed 20% (twenty percent) of capital.

  

The Company is allowed not to set up the legal reserve for the financial year in which the reserve balance, plus the amount of capital reserve addressed in item 1, of article 182, of Law No. 6404/76, exceeds 30% (thirty per cent) of capital. The legal reserve aims at assuring the integrity of the Company’s capital and may only be used to offset loss and increase capital.

 

F-76

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Reserve for investment and expansion

 

According to article 36, item (c), of the Company’s articles of incorporation and article 196 of Law No. 6404/76, the Company may allocate the remaining portion of adjusted net income for the year ended, to reserve for investment and expansion, subject to approval on the General Shareholders’ Meeting.

 

The balance of the retained profits reserve, except for the reserves of unrealized profit and reserves for contingencies, may not exceed the amount of capital. Once this maximum limit is reached, the General Meeting may resolve on the investment of the exceeding portion in the payment, increase of capital or in dividend distribution.

 

d)Dividends

 

On November 14, 2019, the Company paid the dividends approved at the Annual Shareholders Meeting held on October 16, 2019, which included minimum mandatory dividends of R$42,056 and additional dividends proposed of R$7,944. In accordance with article 40 of the Bylaws, dividends not received or claimed will be time-barred within three (3) years from the date they were made available to the shareholder, and will revert to the Company.

 

Pursuant to article 36, of the Company’s Bylaws, profit for the year shall be allocated as follows after allocation to legal reserve: (i) 25% (twenty five percent) of adjusted net profit shall be allocated to the payment of mandatory dividends and (ii) the remaining portion of adjusted net income may be allocated to the reserve for investment and expansion.

 

The allocation of net income for the year as of June 30, 2020 is as follows:

  

   2020   2019 
Profit for the year   119,554    177,079 
(-) Constitution of legal reserve (5% of net profit)   (5,978)   (8,854)
Adjusted profit for the year   113,576    168,225 
           
(-) Mandatory minimum dividends - 25% of adjusted net profit   (28,394)   (42,056)
(-) Additional dividends proposed   (13,606)   (7,944)
           
Proposed dividends   (42,000)   (50,000)
           
Constitution of reserve for investments and expansion   71,576    118,225 
           
Total shares of paid up capital (per thousand shares)   62,104    56,889 
(-) Treasury shares (per thousand shares)   (2,762)   (3,087)
(=) Outstanding shares (per thousand shares)   59,342    53,802 
           
Dividend per share (R$)   0.71    0.93 

 

e)Other comprehensive income

 

At June 30, 2020, the effects from foreign exchange rate differences arising from the translation of Cresca, Palmeiras and Moroti financial statements amounted to R$76,463 (negative (R$1,007) on June 30, 2019 and R$27,084 on June 30, 2018), and the accumulated effect totalled to R$115,339 as of June 30, 2020 (R$38,876 as of June 30, 2019 and R$39,883 as of June 30, 2018, due to the write-off of (R$30,616) upon the re-distribution of the assets and liabilities of Cresca in the fiscal year ended June 30, 2018).

 

F-77

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

f)Treasury shares

 

Under article 20, item XII of the Bylaws of the Company, the Board of Directors is responsible, among others established in the law or the Bylaws, for deliberating on the acquisition by the Company of shares issued by itself, to be held in treasury and/or later cancellation or sale.

 

Changes in treasury shares in the year are as follows:

 

Treasury shares  Number of shares   Amount (R$) 
At June 30, 2018   3,086,748    35,208 
           
At June 30, 2019   3,086,748    35,208 
Transfers (Note 23.a)   (324,928)   (3,707)
At June 30, 2020   2,761,820    31,501 

 

g)Subscription warrants

 

On March 15, 2006, the Board of Directors approved the issuance of 512,000 shares subscription warrants, 256,000 of which for first issue, and 256,000 for second issue, which were delivered to the founder shareholders, in proportion to their interest in the Company’s capital at the date of issue of the subscription warrant. Each issue of subscription warrant grants their holders the right to subscribe shares issued by the Company, in an amount equivalent to 20% of its capital after the increase arising from the full exercise of the subscription warrant of each issue.

 

Subscription warrants of the first issue grant their holders, as from the dates on which they become exercisable, the right to subscribe the shares issued by the Company through the payment of the price per share used in the initial public offering, subject to certain restatement and adjustment rules. The subscription warrants of the first issue were issued in three series, which differ solely as to the date on which the right to subscribe the shares granted by them start.

 

Exceptionally, the subscription warrants of the first issue may be exercised by their holders in the event of transfer of the Company’s control or acquisition of material interest, as defined in the terms of the corporate documents that decided on the issue of the subscription warrants.

 

The subscription warrants of the second issue grant the holders the right to subscribe shares issued by the Company for up to 15 years, from the date of publication of the announcement of closing of the initial public offering of shares and solely in the events of transfer or acquisition of material shareholding control in the Company, as defined in the terms of the corporate document that decided on the issue of the subscription warrants. In such events, public offerings for acquisition of all the outstanding shares of the Company shall be presented. For the subscription of shares object of the subscription warrants of second issue, their holders shall be required to pay the same price per share used in the abovementioned public offerings of acquisition of the Company’s shares.

 

The number of shares to be subscribed according to the subscription warrants shall be adjusted in case of split or reverse split of shares. The detailed information of the second issue market value of these subscription warrants is shown in the table below:

 

   Second issue 
BrasilAgro  2020   2019 
         
Price of share - R$   20.96    16.60 
Maturity (years)   15    15 
Maturity (day/month/year)   4/27/2021    27/04/2021 
Exercise price at year end - R$/share   20.66    20.23 
Number of existing shares   62,104,301    56,888,916 
Percentage of capital available for conversion (shares) - %   20    20 
Number of outstanding shares and stock purchase warrants   256,000    256,000 

 

F-78

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

20. Segment information

 

Segment information is presented consistently with the internal report provided by the chief operating decision maker that is the Executive Board, responsible for allocating resources, assessing the performance of the operating segments, and for making the Company’s strategic decisions.

 

Segment information is based on information used by BrasilAgro executive board to assess the performance of the operating segments and to make decisions on the investment of funds. The Company has six segments, namely: (i) real estate, (ii) grains, (iii) sugarcane, (iv) cattle raising, (v) cotton and (vi) other. The operating assets related to these segments are located only in Brazil. The main activity of the grains segment is the production and sale of soybean and corn.

 

The Sugarcane segment includes the sale of the raw product.

 

The Real Estate segment presents the P&L from operations carried out in the Company’s subsidiaries.

 

The cattle raising segment consists of producing and selling beef calves after weaning, which characterizes the activity as breeding and fattening of cattle.

 

The cotton segment is engaged primarily in the production and sale of cotton lint and seed.

 

F-79

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The selected P&L, liabilities and assets information by segment, which were measured in accordance with the same accounting practices used in the preparation of the financial statements, are as follows:

  

   2020 
           Agricultural activity    
   Total   Real estate   Grains   Cotton   Sugarcane   Cattle raising   Other   Corporate 
Net revenue   487,568    14,680    233,413    13,052    192,942    32,674    807    - 
Gain from sale of farm   61,420    61,420    -    -    -    -    -    - 
Gain (loss) on fair value of biological assets and agricultural products (Note 9)   160,371    -    86,373    1,373    75,861    (1,298)   (1,938)   - 
Reversal of provision for agricultural products after harvest   (4,153)   -    (4,153)   -    -    -    -    - 
Cost of sales   (483,813)   (4,876)   (245,805)   (13,529)   (184,811)   (32,436)   (2,356)   - 
Gross profit   221,393    71,224    69,828    896    83,992    (1,060)   (3,487)   - 
Operating income (expenses)                                        
Selling expenses   (14,300)   3,731    (16,247)   (282)   (1,136)   (366)   -    - 
General and administrative expenses   (43,890)   -    -    -    -    -    -    (43,890)
Other operating income   1,231    -    -    -    -    -    -    1,231 
Equity pickup   (150)   -    -    -    -    -    -    (150)
Operating income (loss)   164,284    74,955    53,581    614    82,856    (1,426)   (3,487)   (42,809)
Net financial income                                        
Financial income   375,413    146,161    11,325    886    -    -    23,053    193,988 
Financial expenses   (406,168)   (133,795)   (39,362)   (3,651)   (4,828)   (1,532)   (43,175)   (179,825)
Net income (loss) before taxes   133,529    87,321    25,544    (2,151)   78,028    (2,958)   (23,609)   (28,646)
Income and social contribution taxes   (13,975)   (6,722)   (8,685)   731    (26,530)   1,006    8,027    18,198 
Net income (loss) for the year   119,554    80,599    16,859    (1,420)   51,498    (1,952)   (15,582)   (10,448)
Total  assets   2,044,368    1,171,762    226,733    17,224    161,706    35,905    26,678    404,360 
Total liabilities   922,799    161,609    220,751    -    73,290    -    -    467,149 

 

F-80

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

   2019  
         Agricultural activity    
    Total    Real estate   Grains   Cotton   Sugarcane   Cattle raising  

Other

   Corporate 
Net revenue   357,910    8,520    171,735    -    160,476    16,795    384    - 
Gain from sale of farm   142,812    142,812    -    -    -    -    -    - 
Gain (loss) on fair value of biological assets and agricultural products (Note 9)   56,718    -    18,714    2,619    34,511    1,526    (652)   - 
Reversal of provision for agricultural products after harvest   (2,040)   -    (2,040)   -    -    -    -    - 
Cost of sales   (319,214)   (1,788)   (156,656)   -    (142,303)   (17,118)   (1,349)   - 
Gross profit   236,186    149,544    31,753    2,619    52,684    1,203    (1,617)   - 
Operating income (expenses)                                        
Selling expenses   (10,536)   (35)   (10,885)   -    -    (201)   585    - 
General and administrative expenses   (38,812)   -    -    -    -    -    -    (38,812)
Other operating income   (1,064)   -    -    -    -    -    -    (1,064)
Equity pickup   1,102    -    -    -    -    -    -    1,102 
Operating income (loss)   186,876    149,509    20,868    2,619    52,684    1,002    (1,032)   (38,774)
Net financial income                                        
Financial income   310,538    93,460    13,699    -    79,232    -    11,549    112,598 
Financial expenses   (297,616)   (116,502)   (9,566)   -    (44,948)   -    -    (126,600)
Net income (loss) before taxes   199,798    126,467    25,001    2,619    86,968    1,002    10,517    (52,776)
Income and social contribution taxes   (22,719)   (7,724)   (8,500)   -    (29,569)   (341)   (3,576)   26,991 
Net income (loss) for the year   177,079    118,743    16,501    2,619    57,399    661    6,941    (25,785)
Total  assets   1,357,614    777,664    156,420    12,955    157,920    39,135    26,733    186,787 
Total liabilities   477,081    -    85,486    -    43,482    -    -    348,113 
                                         

 

The balance sheet accounts are mainly represented by “Trade accounts receivables”, “Biological assets”, “Inventories of agricultural products” and “Investment properties”.

 

a) Information on concentration of clients

 

In the year ended June 30, 2020, the Company has four clients individually representing 10% or more of consolidated revenues, representing 73% of the total sales of the Company. Of these four clients, two account for 100% of the revenues from the sugarcane segment and two account for 61% of the revenues from the grains segment. There are no clients in other segments that represent 10% or more of revenue of total sales.

 

In the year ended June 30, 2019, the Company has four clients individually representing 10% or more of the revenues from the sugarcane or grains segments, representing 85% of the total sales of the Company. Of these four clients, two account for 100% of the revenues from the sugarcane segment and two account for 71% of the revenues from the grains segment.

 

b) Geographic information

 

Revenues and noncurrent assets, excluding financial instruments, income tax and social contribution, deferred assets and rights arising from insurance contracts of the Consolidated, are distributed as follows:

 

       Brazil       Paraguay 
   2020   2019   2020   2019 
Net income   464.998    329,071    22,570    28,839 
Non-current   853,957    516,768    275,957    188,785 

 

F-81

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

21. Revenues

 

a)Operating sales

 

   2020   2019   2018 
Sales of grains   237,904    175,000    99,875 
Sales of cotton   13,104    -    - 
Sales of sugarcane   192,943    163,114    142,037 
Sales of beef cattle   33,609    16,974    4,115 
Lease   18,127    9,598    6,592 
Other revenues   1,658    1,086    132 
Gross operating revenue   497,345    365,772    252,751 
                
Sales deductions               
Taxes on sales   (9,777)   (7,862)   (8,473)
                
Net revenue   487,568    357,910    244,278 

 

b)Sale of farms

 

   2020   2019   2018 
Sale of farm   83,179    238,414    66,224 
Adjustment to present value   (11,687)   (61,192)   (13,818)
Gross revenue from sale of farm   71,492    177,222    52,406 
                
Sales taxes   (2,610)   (6,469)   (1,913)
Cost of sale of farm   (7,462)   (27,941)   (10,676)
                
Gain from sale of farm   61,420    142,812    39,817 
Selling expenses   -    (35)   - 
Income tax and social contribution   (2,201)   (5,459)   (1,614)
Net profit from sale of farm   59,219    137,318    38,203 

  

F-82

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

22. Expenses by nature

 

   Cost of products sold   Selling expenses   General and administrative
expenses		   Total 
Depreciation and amortization   58,737    -    1,512    60,249 
Personnel expenses   25,115    2,290    30,681    58,086 
Expenses with service provider   143,808    -    5,593    149,401 
Leasing   13,462    -    175    13,637 
Cost of agricultural products   134,972    -    -    134,972 
Fair value of cost of agricultural products   96,689    -    -    96,689 
Freight and storage   -    14,450    -    14,450 
Allowance for doubtful accounts   -    (2,440)   -    (2,440)
Maintenance, travel expenses and others   11,030    -    5,929    16,959 
At June 30, 2020   483,813    14,300    43,890    542,003 
Depreciation and amortization   22,494    -    584    23,078 
Personnel expenses   18,660    1,423    28,679    48,762 
Expenses with service provider   108,147    -    3,449    111,596 
Leasing   20,512    -    803    21,315 
Cost of agricultural products   98,561    -    -    98,561 
Fair value of cost of agricultural products   39,163    -    -    39,163 
Freight and storage   -    9,608    -    9,608 
Allowance for doubtful accounts   -    (530)   -    (530)
Sale of farms   -    35    -    35 
Maintenance, travel expenses and others   11,677    -    5,297    16,974 
At June 30, 2019   319,214    10,536    38,812    368,562 
Depreciation and amortization   22,406    -    816    23,222 
Personnel expenses   4,265    2,223    24,133    30,621 
Expenses with service provider   53,014    -    4,279    57,293 
Leasing   7,799    -    689    8,488 
Cost of agricultural products   130,188    -    -    130,188 
Freight and storage   -    7,731    -    7,731 
Allowance for doubtful accounts   -    133    -    133 
Maintenance, travel expenses and others   10,647    -    5,028    15,675 
At June 30, 2018   228,319    10,087    34,945    273,351 

F-83

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise) 

 

23. Management compensation and share based payments

 

The expenses with Management compensation were recorded under “General and administrative expenses”, as follows:

 

   2020   2019   2018 
Board of directors and executive board compensation   3,789    2,869    2,491 
Bonuses   7,093    8,315    6,856 
Overall compensation   10,882    11,184    9,347 
Share
   1,117    741    646 
Total compensation   11,999    11,925    9,993 

 

The total compensation of the Company’s officers and members of the Board of Directors, for the year ended June 30, 2020 in the amount of R$13,500, was approved at the Annual General Meeting held on October 16, 2019.

 

a)Long-term Share-based Incentive Plan

 

On October 2, 2017, the Shareholders Meeting approved the creation of the Long-term Share-based Incentive Plan (“ILPA Plan”). Under the terms of the ILPA Plan, participants will be entitled to receive a certain number of shares if they remain in the Company for a vesting period and achieve certain key performance indicators (“KPIs”). The ILPA Plan establishes that the Board of Directors will have broad powers to implement the ILPA Plan and take all measures necessary for it. The shares to be granted under the ILPA Plan may not exceed, at any time, the maximum and cumulative limit of 2% of the shares issued by the Company.

 

The first grant of incentives was approved by the Board of Directors on June 18, 2018, when the 1st ILPA Program was approved and the beneficiaries, number of shares to be granted, vesting period and KPIs to be achieved were defined.

 

The vesting period for the 1st ILPA Program is the period between October 2, 2017 and October 2, 2019, and participants were selected from among those who were Company employees at the start of the vesting period, considering their category and compensation on that date.

 

Shares will be granted to participants only if they remain employed by the Company until the end of the vesting period and achieve certain KPIs. One of the KPIs is a certain percentage of appreciation of the price of the AGRO3 stock in the vesting period; if such percentage is not reached, participants will not have the right to receive any shares. If the KPI of stock appreciation is achieved, the number of shares to be granted will vary in three ranges, depending on the level of achievement of three other KPIs, and will be adjusted by the dividends per share distributed in the vesting period, and will increase by an amount established in case the share appreciation exceeds the floor price.

 

F-84

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

The fair value of the benefit was estimated at R$8.61. To measure the fair value of the benefit, the Company considered the price of the AGRO3 stock on the date of the grant and projected the probable range of stock price at the end of the vesting period based on the past performance of the stock price in a period of 1 year and 4 months (compatible with the period between the grant in June 2018 and the end of the vesting period in October 2018). Considering the volatility of the AGRO3 stock, the Company determined the probability of the stock price at the end of the vesting period reaching the value necessary to achieve the appreciation KPI.

 

The maximum number of shares to be issued is 441,563 (outstanding on June 30, 2019). In the period, no shares were cancelled or issued to the beneficiaries, and the number of shares will be adjusted by the dividends per share distributed during the vesting period.

 

To determine the number of shares and the compensation expense, in each fiscal year the Management determines the estimated number of shares to be granted based on its best judgment of the portion of each of the three KPIs that does not depend on the stock price and the dividends to be paid in the vesting period. The expense amount is adjusted on account of such revision and the effects are recognized prospectively. The estimated expense is recognized upon the grant in June 2018, being appropriated linearly during the vesting period, between October 2, 2017 and October 2, 2019.

 

Once the vesting period ended, the Company conducted the settlement of the plan with the transfer of R$3,707 in shares. On June 30, 2020, the expenses of the ILPA Plan and its charges amounted to R$3,529 (R$1,648 on June 30, 2019) and R$4,193, respectively. Accumulated expenses with the plan amounted to 6,020 (R$2,491 on June 30, 2019).

 

24. Other operating income (expenses), net

 

   2020   2019   2018 
Loss on sale of PPE   (151)   (64)   (380)
Provision for legal claims   (601)   383    387 
Surplus gain from re-distribution of the assets and liabilities (a)   -    -    5,098 
Write-off of effect of conversion of joint venture due to re-distribution of the assets and liabilities (a)   -    -    30,616 
Agricultural insurance claims   6,315    -    - 
Expenses with acquisition of Agrifirma   (2,530)   -    - 
Warrants and restricted shares (b)   (1,053)   -    - 
Other (c)   (749)   (1,383)   (289)
    1,231    (1,064)   35,432 

 

(a)On February 9, 2018, the Company concluded the re-distribution of the assets and liabilities of Cresca, with the portion of assets and liabilities transferred to the wholly-owned subsidiary Agropecuária Moroti S.A. Since the investment was recorded as R$115,478 and the fair value assessed was R$120,576, the Company recorded a gain of R$5,098 in statement of income. Furthermore, R$30,616 held in other comprehensive income that included the effects on the conversion of investment abroad was written off from the statement of income for the year.
(b)In the acquisition of Agrifirma, BrasilAgro issued warrants as part of the consideration paid, which correspond to rights that entitle the selling shareholders to acquire 601,302 shares for R$0.01. The obligation was recognized as financial liabilities and continues to be measured at fair value due to compliance with certain conditions that could change the number of shares to be transferred (Note 1.1).

 

(c)In 2019, the Company made donations to institutions in the amount of R$545.

 

F-85

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

25. Financial income and expenses

 

   Notes  2020   2019   2018 
Financial income               
Interest on marketable securities      5,396    5,507    4,341 
Interest on receivable      3,619    622    10,462 
Monetary variations (i)      -    -    160 
Foreign exchange variation (i)      14,038    17,110    12,058 
Gain on remeasurement of leases (iii)      15,246    16,843    - 
Gain on remeasurement of receivables from sale of farms (iv)      130,915    156,156    39,337 
Realized profit  from derivative transactions (v)  6   50,484    55,611    16,861 
Unrealized profit  from derivative transactions (vi)  6   155,715    58,689    46,104 
       375,413    310,538    129,323 
Financial expenses                  
Marketable securities charges      (1,456)   (294)   (1,372)
Bank charges      (706)   (1,334)   (685)
Interest accrued      (25,248)   (18,171)   (28,768)
Monetary variation (i)      -    -    (346)
Foreign exchange variation (ii)      (15,765)   (17,724)   (11,792)
Gain on remeasurement of leases (iii)      (36,091)   (19,309)   - 
Loss on remeasurement of  receivables from sale of farms (iv)      (72,535)   (142,167)   (26,616)
Realized loss from derivative financial transactions (v)  6   (91,196)   (35,453)   (23,968)
Unrealized loss from derivative financial transactions (vi)  6   (163,171)   (63,164)   (44,332)
       (406,168)   (297,616)   (137,879)
Financial income (expense), net      (30,755)   12,922    (8,556)

F-86

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Net balances are as follows:

 

   2020   2019   2018 
Monetary variations (i)  -   -   (186) 
Foreign exchange difference (ii)   (1,727)   (614)   266 
Net on remeasurement of leases (iii)   (20,845)   (2,466)   - 
Net on remeasurement of receivables from sale of farms (iv)   58,380    13,989    12,721 
Realized  profit (loss) from derivative financial instruments (v)   (40,712)   20,158    (7,107)
Unrealized (loss) profit from Derivative financial instruments (vi)   (7,456)   (4,475)   1,772 

 

26. Earnings per share

 

   2020   2019   2018 
Profit attributed to controlling shareholders   119,554    177,079    126,338 
Weighted average number of common shares issued (thousands)   56,681    53,802    53,750 
Effect from dilution – shares   420    306    64 
Weighted average number of common shares issued adjusted by the dilution effect   57,101    54,108    53,813 
Basic earnings per share   2.1092    3.2913    2.3505 
Diluted earnings per share   2.0937    3.2727    2.3477 

 

27. Provision for legal claims

 

The Company is involved in civil, labor, environmental and tax lawsuits and administrative proceedings. The provision for probable losses arising from these lawsuits is determined and updated by management, supported by the opinion of the Company’s external legal advisors.

 

Probable likelihood of loss

 

   Labor   Administrative   Tax   Civil   Total 
At June 30, 2018   990    -    195    22    1,207 
Additions   278    -    -    25    303 
Monetary restatement   114    -    -    -    114 
Reversal/payments   (580)   -    (195)   (25)   (800)
At June 30, 2019   802    -    -    22    824 
Additions   418    65    -    378    861 
Monetary restatement   103    2    -    -    105 
Reversal/payments   (365)   -    -    -    (365)
Acquisition Agrifirma   60         -    -    60 
At June 30, 2020   1,018    67    -    400    1,485 

 

Possible likelihood of loss

 

The Company is party to legal suits of civil, labor, environmental and tax natures, and administrative tax proceedings for which no provisions were set up, since they involve risk of loss classified as possible by the Company and its external legal advisors. The contingencies are as follows:

 

   2020   2019 
Civil   9,532    9,190 
Tax   4,511    4,062 
Labor   3,389    825 
Environmental   193    279 
    17,625    14,356 

 

F-87

 

 

BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

Judicial deposits

 

   2020   2019 
Labor   378    389 
Tax   1,178    1,143 
Civil   150    135 
(Note 7)   1,706    1,667 

 

28. Commitments

 

a)Contracts of sugarcane supply between BrasilAgro and Brenco

 

For the year ended June 30, 2020, gross sugarcane sales of BrasilAgro to Brenco came to R$82.8 million, representing 16.9% of the Company’s total net revenue.

 

   2020   2019     2018 
   Number (tons)   Amount     Number (tons)   Amount       Number (tons)   Amount 
Net revenue from sugarcane   840,625    82,763    761,996    73,480    842,960    81,375 

 

The price of sugarcane ton delivered was calculated on Total Sugar Recoverable (ATR) assessed on the sales date.

 

There is a future balance of sugarcane to be delivered, the estimated quantity and amounts of which are difficult to be established considering the scenarios of fluctuating market value and crop productivity.

 

b)Sugarcane agricultural partnership agreement (IV)

 

On February 7, 2017, the Company entered into an agricultural partnership agreement involving a property in São Raimundo das Mangabeiras, in the state of Maranhão, named Partnership IV.

 

The third agreement deals with sugarcane supply, in which the parties aim to regulate the price and conditions of supply, as well as the obligations of each party in a cyclical system, which involves the need to supply sugarcane, in a certain delivery frequency and schedule that is consistent with buyer’s receipt and production capacity.

 

For the year ended June 30, 2020, net sugarcane sales to Partnership IV came to R$110.2 million, representing 22.5% of the Company’s total net revenue.

 

   2020   2019   2018 
  

Quantity

(Tons)

   Amount  

Quantity

(Tons)

   Amount  

Quantity

(Tons)

   Amount 
Gross sugarcane sales Partnership IV   1,221,728    110,179    1.019.232    86.996    838,501    56,848 

 

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BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

29. Transactions with related parties

 

   2020   2019 
Current assets        
Hemir (a)   314    301 
Cresud (a)   176    116 
Other (c)   211    1,570 
    701    1,987 
Non-current assets          
Other (c)   1,511    - 
    1,511    - 
Current liabilities – trade accounts payable          
Trade accounts payable (b)   1,724    1,358 
Cresud (a)   814    556 
Irsa (a)   -    51 
Ombu   -    273 
Other   311    167 
    2,849    2,405 

 

a)Expenses and revenue related to Due Diligence of new acquisitions and implementation of the budget and controls system and reimbursement of general expenses;
b)Acquisition of biological assets and other items related to the Palmeiras operation;
c)The amounts substantially refer to the total shares exercised under the Second and Third Programs, as detailed in Note 23.

 

30. Non-current assets held for sale

 

The Company entered into a Sale Commitment of a 2,160 hectare area of the Bananal Farm (“Bananal X”), a property located in the municipality of Luís Eduardo Magalhães (Bahia), with 1,714 hectares of agricultural area and 446 hectares of legal reserve and permanent preservation area.

 

The parties negotiated the property for R$28,000, divided into seven installments, with an advance of R$2,000 to be paid in two installments, with the first on February 20, 2019 and the second 30 days. The advances were received and are recorded as advances from customers.

 

A disagreement involving the lessee of the area upon the sale impeded its recognition until this reporting date, and the asset remained registered under Non-current assets held for sale. However, during July 2020, the parties concluded the agreement, the conditions precedent were fully met and, on July 31, 2020, the ownership of the farm was transferred, consummating the sale of Bananal X.

 

IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations – establishes that non-current assets held for sale must be measured by the lesser the book value registered to date and the fair value less selling expenses, accordingly the amount recognized on June 30, 2020 was:

 

   2020 
Book value   28,851 
Measurement at fair value   (2,994)
Fair value minus selling expenses (a)   25,857 

 

(a)Measured at nominal sales value, less brokerage expenses and discounting to present value. The variation in fair value registered between January 27, 2020 (Acquisition of Agrifirma) and this reporting date was R$2,015, registered under financial result.

 

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BrasilAgro – Companhia Brasileira de Propriedades Agrícolas

Notes to the financial statements

June 30, 2020

(In thousands of reais, except as stated otherwise)

 

31. Insurance

 

The Company maintain (i) civil liability insurance for all employees working at the farms, (ii) insurance for machinery, (iii) life insurance for all the employees, as well as (iv) insurance for Directors and Officers (D&O) and for other Board members. The coverage amount is considered sufficient by management to cover risks, if any, over its assets and/or liabilities. The Company assessed the risk of farm buildings and facilities owned by the Group, as well as its inventories and biological assets, concluding that there is no need for other types of insurance due to low likelihood of risks.

 

Below is the table of the liabilities covered by insurance and the related amounts at June 30, 2020:

 

Insurance type  Coverage - R$ 
      
Civil liability (D&O)   20,000 
Civil, professional and general liability   10,476 
Machinery   22,296 
Fire/lightning/explosion/electrical damage (office)   7,072 
Storage silo (Chaparral Farm)   36,760 
    96,604 

 

32. Subsequent events

 

Sale of Bananal X Farm

 

The Company concluded the sale of the 2,160 hectares of the Bananal Farm, an area located in the municipality of Luís Eduardo Magalhães, state of Bahia, with 1,714 agricultural hectares. The farm was registered as Non-Current Asset Held for Sale (Note 30) due to a disagreement involving the lessee of the area upon the sale. The conditions precedent set forth in the Sale Commitment were fully met on July 31, 2020 after the receipt of R$5,500. The nominal sale value is R$28,000, of which R$7,500 already has been received by the Company.

 

 

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