Village Farms International, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial amounts are in U.S. dollars; statements report dollars in thousands unless otherwise noted. The company operates produce, Canadian cannabis, U.S. CBD/cannabis-related products, and clean energy businesses.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Sales | $82.9 million | $70.4 million | $153.1 million | $122.8 million |
| Gross margin | $6.3 million; 8% | $5.3 million; 7% | $16.2 million; 11% | $7.6 million; 6% |
| Net loss attributable to Village Farms | $36.6 million | $4.5 million | $43.1 million | $11.9 million |
| Adjusted EBITDA | $(10.3) million | $1.5 million | $(16.4) million | $2.0 million |
| Basic and diluted loss per share | $(0.41) | $(0.06) | $(0.49) | $(0.15) |
| Cash used in operating activities | Not provided by quarter in the filing excerpt | $9.0 million | $15.2 million |
Adjusted EBITDA is a non-GAAP measure and is not standardized; it should not be treated as a substitute for GAAP results. First-half 2022 reported gross margin includes a $3.8 million favorable Pure Sunfarms purchase-price inventory adjustment. Excluding that adjustment, gross margin was $12.4 million, or 8%, compared with $12.0 million, or 10%, in the prior-year period after relevant prior-year adjustments.
Segments and material period-over-period changes
- Revenue growth: Q2 sales rose 18% and first-half sales rose 25%, reflecting the inclusion of Balanced Health and Rose, as well as growth in produce and Canadian cannabis. These acquisitions make comparisons with 2021 less like-for-like.
- Produce: Q2 sales were $47.2 million, but gross margin was negative $9.0 million; first-half gross margin was negative $13.3 million. Management cited higher Texas growing costs, a revised crop cycle, freight, fuel, labor and supply-chain costs, and said increased freight costs could not be passed on to customers.
- Canadian cannabis: Q2 sales were $29.8 million and gross margin was $11.5 million; segment net income was $1.8 million. Q2 Adjusted EBITDA fell to $2.7 million from $7.4 million, primarily due to higher selling, general and administrative costs and purchase-price accounting effects. Price compression affected the market.
- U.S. cannabis/CBD: Q2 sales were $5.8 million and gross margin was $3.8 million. Goodwill and brand impairment charges totaled approximately $29.8 million, reflecting CBD-market challenges, lower valuation multiples and uncertainty about U.S. federal CBD regulation. VF Hemp was not cultivating and recorded inventory-related losses; the remaining $0.6 million loan balance was written off.
- Clean energy: The power plant shut down April 30, 2022, ahead of a planned transition to renewable natural gas (RNG).
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $26.2 million and restricted cash was $6.8 million, for $33.0 million combined. Combined cash was $58.7 million at year-end 2021.
- Working capital was $78.2 million, down from $110.6 million at December 31, 2021. Current assets were $159.0 million and current liabilities were $80.9 million.
- Total long-term debt, including current maturities, was $57.7 million; the balance sheet separately reported $6.9 million in line-of-credit liabilities. The company had $4.0 million drawn on its operating loan and Pure Sunfarms had $2.9 million drawn on its line of credit. The filing reports covenant compliance at June 30, 2022.
- First-half cash flows were $(9.0) million from operations, $(13.7) million from investing and $(2.9) million from financing. Investing included $10.2 million of capital expenditure, principally for Canadian cannabis facilities, and loans/notes receivable.
- Management said existing cash, operating cash generation and available credit, with potential additional debt or equity financing, were expected to meet working capital, debt service, contractual obligations and planned capital expenditures for the next 12 months. This is management’s assessment, not a guarantee.
Outlook, risks and unusual items
- The filing provides no specific financial guidance. Management cautioned that interim results are seasonal and may not indicate full-year results.
- The Delta RNG project received required approvals in the first half of 2022; construction began late in Q2, with startup then expected in mid-2023. The schedule had been delayed by permitting and zoning processes affected by COVID-19.
- After quarter-end, Leli received a Dutch cultivation license on July 7. Village Farms acquired an 85% interest on July 19 for approximately $4.6 million, including conversion of a prior loan and an escrow payment. The Dutch program’s start had been delayed; the company anticipated it could begin around mid-2023.
- Key risks cited include inflation, supply-chain and freight pressures, higher energy costs, produce crop yields and disease, cannabis price competition, regulatory and licensing requirements, uncertainty over U.S. CBD rules, interest rates, foreign exchange, COVID-19 and access to financing.
- Disclosure controls were deemed ineffective at June 30, 2022 because of a previously identified material weakness in review of debt-covenant calculations. The company described additional review and treasury measures and ongoing remediation. It had received a lender waiver for a covenant breach at December 31, 2021, and warned it could not assure compliance or a waiver at the next annual test.
- The filing reports no material current legal proceedings and no material changes to previously disclosed risk factors. It also notes that the company was evaluating optional accounting relief for LIBOR transition and had not adopted it as of June 30.
Important facts for investors to verify
- Whether produce operations can restore positive margins after the substantial first-half losses, and whether higher freight, energy and growing costs can be offset or passed through.
- Underlying Canadian cannabis profitability after excluding purchase-price inventory adjustments, and the effect of continuing market price compression and higher operating expenses.
- Balanced Health’s sales, customer acquisition costs and path to profitability amid CBD regulatory uncertainty; also confirm the impairment amounts and assumptions. The filing’s goodwill impairment component is presented with a minor numerical inconsistency, though total impairment is reported as $29.8 million.
- Cash burn, capital spending, debt maturities and covenant headroom, including the next FCC covenant test and any future financing needs.
- Progress, funding and timing for the Delta RNG project and the licensed Dutch Leli operation.
- Whether remediation of the debt-covenant control weakness is completed and controls are operating effectively.