Village Farms International, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Although the request identifies 2020 Q4, this filing reports full-year results; it does not provide a complete standalone fourth-quarter income statement. All amounts below are U.S. dollars unless stated otherwise; financial statement figures are in thousands unless noted.
Business context
Village Farms operates greenhouse produce, Canadian cannabis, and clean-energy businesses. On November 2, 2020, it acquired Emerald Health Therapeutics’ remaining interest in Pure Sunfarms, bringing ownership to 100%; Pure Sunfarms’ results were fully consolidated only from that date. Before then, its earnings were reported through equity income. The company also holds a 65% interest in a U.S. hemp venture, whose operations were curtailed amid weak CBD demand and regulatory uncertainty.
Key financial metrics
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Sales | $170.1 million | $144.6 million |
| Gross margin | $11.0 million; 6.4% of sales | $(7.3) million; (5.1)% of sales |
| Net income | $11.6 million | $2.3 million |
| Diluted EPS | $0.19 | $0.05 |
| Adjusted EBITDA | $7.4 million | $0.9 million |
| Cash from operating activities | $5.7 million | $(14.4) million |
| Cash used in investing activities | $(51.2) million | $(16.8) million |
| Cash from financing activities | $58.6 million | $31.4 million |
| Cash and cash equivalents at year-end | $21.6 million | $12.0 million |
| Total assets / total liabilities | $354.0 million / $148.7 million | $183.4 million / $56.9 million |
Year-end restricted cash was a further $4.0 million, so reported cash and restricted cash together were $25.7 million. Current assets were $101.8 million versus current liabilities of $72.3 million. Year-end debt included $64.1 million of long-term debt and current maturities, a $2.0 million operating line balance, and a $15.3 million promissory note payable to Emerald. The Emerald note was repaid in February 2021.
Material changes versus prior year
- Sales increased 18%, mainly from higher third-party produce supply revenues, better produce pricing, and two months of consolidated Pure Sunfarms sales. Village Farms’ own produce production revenue declined, in part because Delta 2 was transitioned for cannabis expansion.
- Gross margin improved by $18.3 million, from a loss to a profit, primarily due to stronger produce margins and the inclusion of Pure Sunfarms in the fourth quarter.
- Net income included a $23.6 million noncash gain from remeasuring Village Farms’ previously held Pure Sunfarms interest upon acquisition and a $4.7 million gain related to the Emerald settlement. These gains materially contributed to reported profit.
- Other notable charges included a $3.3 million noncash inventory fair-value adjustment at Pure Sunfarms, a $5.2 million hemp biomass write-down, and a $3.8 million impairment of the loan to the hemp venture.
- Pure Sunfarms’ full-year sales declined 9% to $56.9 million. Retail and branded sales expanded, but average selling prices fell and lower-margin retail sales made up a larger share of the mix. The 2019 comparison included approximately $6.3 million of revenue associated with an Emerald settlement.
- Investing cash outflow rose substantially, including $34.6 million of net acquisition costs and $11.7 million invested in Pure Sunfarms’ Delta 2 conversion. Financing included $53.9 million of net proceeds from common shares and warrants.
Outlook, commentary, risks and unusual items
- Expansion and projects: Delta 2 was under construction, with planting in the western half anticipated in summer 2021, subject to Health Canada attestation. The company expected work on its Delta renewable natural gas project to begin in mid-2021 and commercial operations in mid-2022; management expected it to provide food-grade CO2 and improve financial returns.
- Liquidity and covenants: Village Farms was not compliant with certain annual FCC term-loan financial covenants at December 31, 2020, but received a waiver. Future compliance or waivers were not assured. Its operating loan was described as maturing in May 2021 in the risk discussion and February 2024 in the MD&A; the filing text does not provide a clear, consistent maturity date. Pure Sunfarms’ bank facilities were amended in March 2021, extending maturity to February 2024. Management said it believed liquidity was adequate for the foreseeable future.
- Subsequent financing: A January 2021 registered direct offering raised approximately $135 million gross through issuance of 10.9 million shares, before fees and expenses. This added liquidity but diluted existing shareholders.
- Market and operating risks: Management described Canadian cannabis as oversupplied and highly competitive, with pressure on wholesale prices and margins. Produce pricing, energy costs, labor availability, crop disease, weather, customer concentration, and dependence on third-party growers and distributors also pose risks.
- Regulatory and COVID-19 risks: Cannabis licensing, marketing limits, and provincial distribution rules remain material uncertainties. The company reported that operations continued, but cannabis operations and financial performance were negatively affected by COVID-19 in 2020; further effects were uncertain.
- Hemp: The U.S. hemp business was in a holding pattern, primarily selling previously harvested biomass, after the FDA’s position constrained CBD uses and demand was weak.
- Contingency: On March 11, 2021, Village Farms L.P. received a U.S. Customs and Border Protection investigation notice concerning imported Canadian tomatoes from a third-party grower and a suspected ToBRFV issue. The company said it was cooperating. It reported no material legal proceedings as of the filing’s legal-proceedings disclosure.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor issued an unqualified opinion on the financial statements but did not provide an opinion on internal control effectiveness.
Most important facts for investors to verify
- How much of reported FY 2020 profit is recurring: assess the acquisition and settlement gains, hemp write-downs, and acquisition-related inventory charge separately from ongoing operations.
- Whether produce and cannabis margins can be sustained, particularly given cannabis price pressure, the shift toward lower-margin retail sales, and produce-market competition.
- Current debt balances, facility maturities, covenant compliance and waivers, including the operating-loan maturity discrepancy in the filing.
- Delta 2 construction progress, required Health Canada attestation, and the timing, cost, and expected economics of added production capacity.
- Use of proceeds from the January 2021 equity offering, subsequent share count and dilution, and the status of outstanding warrants and equity awards.
- Developments and potential consequences of the CBP tomato-import investigation, including any disruption to cross-border shipments.