Village Farms International, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed April 1, 2020. Financial figures below are in U.S. dollars unless stated otherwise. The filing covers the full year, not standalone fourth-quarter results. Village Farms reports greenhouse produce and energy operations on a consolidated basis; Pure Sunfarms and the hemp ventures are accounted for as equity-method joint ventures and are not consolidated.
Business context and key metrics
Village Farms grows and distributes greenhouse vegetables in the U.S. and Canada, operates a landfill-gas power facility, and holds interests in Canadian cannabis producer Pure Sunfarms and U.S. hemp ventures. Produce remained the principal source of consolidated revenue. Company-reported consolidated results exclude joint-venture revenue, except for Village Farms’ share of joint-venture earnings.
| Metric (US$ millions, except per-share data) | 2019 | 2018 |
|---|---|---|
| Sales | 144.568 | 150.000 |
| Gross margin | (7.345) | 9.317 |
| Net income (loss) | 2.325 | (7.515) |
| Adjusted EBITDA (non-GAAP) | 0.851 | 2.638 |
| Basic and diluted EPS | $0.05 | $(0.17) |
| Cash from operating activities | (14.387) | (4.677) |
| Cash and cash equivalents, year-end | 11.989 | 11.920 |
| Total assets / total liabilities, year-end | 183.408 / 56.949 | 141.448 / 57.015 |
Gross margin was negative in 2019, approximately negative 5.1% of sales, versus positive 6.2% in 2018. Adjusted EBITDA is a company-defined non-GAAP measure; it includes Village Farms’ stated interests in its ventures and should not be treated as cash flow or a substitute for GAAP earnings.
Changes versus 2018
- Sales declined 4%, primarily from a 12% decrease in revenue from Village Farms’ own produce production; increased third-party supply-partner revenue partly offset the decline.
- Own-production volume fell 8%, attributed to a facility clean-out and plant disease pressure in Texas. Tomato selling prices declined 1.4%, while cost of sales rose 8%, including higher contract-supply and labor costs.
- SG&A increased 19% to $16.762 million, and stock compensation increased to $4.714 million from $1.454 million.
- Net income improved from a loss to a profit, primarily reflecting $13.564 million of gain on the Delta 2 asset contribution and $13.777 million of equity-method earnings from joint ventures. These items offset a loss from consolidated entities of $11.452 million.
- Operating cash outflow widened. Investing outflows included $14.507 million of loans to joint ventures; financing inflows included $34.226 million net proceeds from common-share issuance.
Debt, liquidity and capital
- At year-end, Village Farms had $32.389 million of long-term debt, including current maturities, and a $2.0 million operating-line draw. The FCC term loan balance was $31.306 million, at a 6.391% rate, with a May 2021 maturity and a substantial balance due at maturity. Lease liabilities were $3.660 million.
- The company received waivers for specified FCC debt-service and debt-to-EBITDA covenants. Management disclosed covenant noncompliance and said it was negotiating an amended or replacement term facility; the waiver was stated to extend through June 30, 2020. Continued access to credit and financing was not assured.
- Cash was $11.989 million against $14.387 million of operating cash used. Management identified financing access as important to working capital and continued operations and stated there was no assurance sufficient financing would be available.
- Subsequent events: Village Farms raised C$11.5 million gross in a March 2020 share offering. Pure Sunfarms arranged a C$7.5 million revolving facility and C$12.5 million term facility, conditional on C$16 million of additional shareholder equity; Village Farms reported contributing C$8 million and committing a further C$8 million.
Operations, outlook, risks and unusual items
- Pure Sunfarms: Produced approximately 50,000 kg of cannabis in 2019; management estimated Delta 3 could produce more than 75,000 kg annually in a normal year. Direct provincial sales began in September 2019; the filing described an oversupplied, competitive Canadian market and a slow rollout of retail stores. Delta 2 expansion and licensing remained important execution factors.
- Emerald dispute: Village Farms and Emerald settled their joint-venture disputes in March 2020. Village Farms’ Pure Sunfarms interest was 53.5% at December 31, 2019 and became 57.4% effective March 6, 2020. The settlement cancelled the disputed escrow shares, waived Emerald’s shareholder-loan repayment, and ended the supply agreements. Verify the settlement’s effect on future cash flows, earnings allocation and governance.
- Hemp: The filing said CBD sales were slow after the FDA’s position that CBD could not, for the time being, be added to foods or beverages without specific approval; hemp activities were largely limited to selling harvested biomass. A windstorm destroyed AVGGH’s crop, and Village Farms wrote off its $1.184 million loan to that venture.
- Other earnings items: The $13.564 million gain arose mainly from contributing Delta 2 assets to Pure Sunfarms. Village Farms also reported a $5.866 million income-tax recovery and a $1.184 million write-off of its AVGGH investment. The filing’s separate Pure Sunfarms IFRS statements reported $47.2 million net income, including substantial non-cash biological-asset fair-value gains; those results are not equivalent to Village Farms’ U.S. GAAP equity earnings.
- COVID-19: The pandemic was identified as a developing material risk to demand, labor availability, supply chains, retail openings, financing and future results. Management said the potential impact could not be quantified.
- Produce risks include price pressure from retailers, customer concentration, crop disease, labor and energy costs, transportation, weather and cross-border trade. Cannabis risks include licensing and regulatory compliance, oversupply, pricing, reliance on provincial distributors and the Pure Sunfarms relationship. No material legal proceedings were reported.
- No specific consolidated revenue or earnings guidance was provided. Management’s stated production expectation for Delta 3 is an operating estimate, not a company-wide financial forecast.
Most important facts for investors to verify
- Whether the company secured durable covenant relief or refinanced its debt, and how it met 2020 liquidity and equity-contribution needs.
- Whether produce volumes, disease pressure, labor costs and gross margins improved after the 2019 deterioration.
- Pure Sunfarms’ realized selling prices, cash generation, inventory valuation and progress licensing and operating Delta 2 amid cannabis oversupply.
- The cash collectability and repayment terms of Village Farms’ joint-venture advances, and the post-settlement allocation of Pure Sunfarms earnings and obligations.
- Whether hemp biomass found buyers and whether U.S. regulatory developments enabled viable CBD sales; also the total economic impact of the AVGGH crop loss.
- The extent of COVID-19 effects on operations and financing, and dilution from the 2020 share offering and any subsequent capital raises.