Village Farms International, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. All figures below are U.S. dollars unless stated otherwise. The company operates in produce, cannabis and clean energy. Pure Sunfarms (PSF) became wholly owned in November 2020 and was fully consolidated in Q1 2021; Q1 2020 PSF results were mainly reflected as equity earnings, so reported year-over-year comparisons are not directly comparable.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Sales | $52.4 million | $32.1 million, up 63% |
| Gross margin | $2.3 million; 4% | $0.8 million; 2% |
| Gross margin excluding PSF acquisition inventory charge | $5.2 million; 10% | — |
| Net income (loss) | $(7.4) million; $(0.10) per share | $4.2 million; $0.08 per share |
| Adjusted EBITDA (non-GAAP) | $0.4 million | $1.1 million |
| Cash used in operating activities | $(14.4) million | $(0.5) million |
| Cash used in investing activities | $(5.2) million | $(6.3) million |
| Cash provided by financing activities | $129.6 million | $8.4 million |
At March 31, cash and cash equivalents were $131.7 million, with an additional $4.1 million of restricted cash. Working capital was $165.4 million, versus $29.5 million at year-end 2020. Reported debt was $66.3 million, including $10.4 million of current maturities and $55.9 million of long-term debt; the operating line had no balance drawn. Total liabilities were $135.7 million.
Material changes and operating drivers
- Sales growth primarily reflected $17.5 million of consolidated PSF revenue and increased produce supply-partner sales. Produce revenue was $34.9 million, compared with $32.0 million.
- Produce pricing was pressured by excess tomato supply and weaker retailer demand. The average selling price of the company’s tomatoes fell 24% year over year, partly offset by a 14% increase in its own production volume.
- PSF sales rose to $17.5 million from $13.1 million, but its reported gross margin fell to $2.2 million from $6.9 million. Q1 2021 included a $2.9 million non-cash acquisition-date inventory fair-value charge; excluding it, PSF gross margin was $5.1 million, or 29% of sales. Management also cited wholesale price compression and higher branded-product manufacturing, packaging and distribution costs.
- Net income moved to a loss amid the lower reported PSF gross margin, higher SG&A and share-based compensation, and the absence of the prior-year $4.7 million settlement gain and $3.2 million of equity earnings from unconsolidated entities. Share-based compensation was $2.0 million versus $0.5 million.
- Operating cash outflow increased, with working-capital changes using $9.7 million. Investing outflow included $4.7 million of capital expenditures, primarily for PSF’s Delta 2 greenhouse conversion, and a $0.5 million Altum investment.
Capital, outlook and risks
- A January 2021 registered direct offering generated $135 million gross proceeds; warrant exercises added $17.7 million. Common shares outstanding increased to 81.2 million at March 31 from 66.9 million at year-end 2020.
- PSF amended its credit agreement in March, extending facility maturities through February 2024 and changing certain covenants. The company and PSF reported compliance with their respective financial covenants at quarter-end. The company repaid the Emerald acquisition note in February.
- Management said it expected to use cash on hand, operating cash flows and, as needed, financing to fund working capital, maintain or improve assets and invest in PSF. On May 7, 2021, after quarter-end, the company amended its operating loan, setting a maximum revolving commitment of C$10 million and extending maturity to May 7, 2024.
- The Delta renewable natural gas project was expected to begin conversion in mid-2021, with commercial operations anticipated in mid-2022. The company said the project could provide food-grade CO2 to its Delta greenhouses and reduce natural-gas requirements; these are forward-looking expectations, not guarantees.
- Key disclosed risks include agricultural and cannabis market volatility, tomato price pressure, cannabis wholesale oversupply, regulatory and licensing requirements, financing and interest-rate exposure, foreign exchange, energy costs, COVID-19 uncertainty and execution of greenhouse conversions. Management reported that operations were operating normally at the time of filing. Routine legal proceedings were not considered material; PSF had a C$1.0 million potential service-agreement termination fee.
Investor verification points
- Assess recurring profitability and cash generation against the reported net loss, negative operating cash flow and non-GAAP Adjusted EBITDA; review the company’s reconciliation and adjustments.
- Separate PSF’s underlying performance from consolidation effects and the $2.9 million acquisition inventory charge; compare branded and non-branded sales, pricing and margins.
- Track produce pricing, particularly tomatoes, and whether volume and production-efficiency gains offset market price pressure.
- Review the use of offering and warrant proceeds, share-count dilution, debt maturities, covenant terms and the amended operating facility.
- Monitor Delta 2 licensing and conversion progress, and the timing, costs and commercial start-up of the Delta renewable natural gas project.