Village Farms International, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited financial statements are in U.S. dollars; amounts below are in millions unless stated otherwise. The business spans greenhouse produce, Canadian cannabis, U.S. CBD products and clean energy. Q1 2022 includes Balanced Health for the full quarter and Rose LifeScience, in which Village Farms owns 70%; neither was included in Q1 2021 results.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Sales | $70.2 | $52.4 |
| Gross margin | $9.9; 14% of sales | $2.3; 4% of sales |
| Net loss attributable to Village Farms | $(6.5) | $(7.4) |
| Loss per share, basic and diluted | $(0.07) | $(0.10) |
| Adjusted EBITDA, non-GAAP | $(6.1) | $0.4 |
| Cash used in operating activities | $(9.6) | $(14.4) |
| Cash used in investing activities | $(8.7) | $(5.2) |
Revenue increased 34%, reflecting growth in produce and Canadian cannabis, plus the inclusion of Balanced Health and Rose. Gross margin improved overall, but produce reported a gross loss of $4.3 million while Canadian cannabis generated $9.5 million of gross margin and U.S. cannabis $4.7 million. Canadian cannabis gross margin included a $2.1 million favorable purchase-price inventory adjustment; excluding that adjustment, management reported a 34% margin for the segment. Adjusted EBITDA fell from $0.4 million to a $6.1 million loss, primarily due to weaker produce operating results.
Liquidity, debt and cash flow
- At March 31, cash and cash equivalents were $34.6 million, with restricted cash of $6.8 million; combined cash was $41.4 million, versus $58.7 million at year-end 2021.
- Working capital was $101.5 million, down from $110.6 million at December 31, 2021. Management said available cash, operating cash generation and credit facilities should meet working capital, debt repayment and planned capital expenditure needs for the next 12 months.
- Long-term debt, including current maturities, was $60.3 million; line-of-credit balances were $9.9 million. The company reported compliance with financial covenants at March 31, 2022.
- Operating cash use improved year over year, but remained negative. Investing outflows included $5.3 million of capital expenditures and a $2.7 million loan to a company holding an interest in Leli Holland. Cash flow from financing was $1.0 million, compared with $129.6 million in Q1 2021, when equity and warrant issuances generated substantial proceeds.
Material changes and operating performance
- Produce: Sales rose 19%, but the segment recorded a $4.3 million gross loss, versus a $0.7 million gross profit in Q1 2021. Higher freight and fuel costs, trucker shortages, Texas crop disease pressure, lower expected crop volume and higher cultivation costs weighed on results. Management also recorded a $1.8 million catch-up cost related to the Texas crop cycle.
- Canadian cannabis: Sales increased 25%, including $3.6 million from Rose. Segment gross margin improved, aided by production yields and product mix, but selling, general and administrative expenses increased with growth investments and Rose’s inclusion. Pure Sunfarms’ branded sales declined 10%, partly offset by growth in non-branded sales.
- U.S. cannabis: Balanced Health contributed $7.0 million in sales, with a reported 67% gross margin and $0.6 million of Adjusted EBITDA. More than 99% of its sales were in the United States.
- Share count: 88.6 million common shares were outstanding at March 31, 2022, compared with 88.2 million at year-end 2021.
Outlook, risks and unusual items
- No numerical revenue, earnings or production guidance was provided. Management’s liquidity outlook covers the next 12 months, but results for the quarter are not necessarily indicative of full-year performance.
- The Delta RNG project’s expected start-up moved to mid-2023 from an earlier expectation of the first half of 2022, following permitting and zoning delays. Village Farms said it had obtained most required approvals in Q1 2022.
- Pure Sunfarms received EU Good Manufacturing Practice certification for its Delta 3 facility in March 2022, enabling exports of certified medical cannabis to eligible international markets. The company had not exercised its option to acquire 80% of Leli Holland as of the filing; the option remains discretionary.
- Management cited inflation, supply-chain disruption, higher energy and transportation costs, labor constraints, and possible effects from the Russia/Ukraine conflict. It also identified COVID-19 uncertainty, cannabis and CBD regulation, licensing, product pricing, financing and interest-rate exposure as risks.
- Disclosure controls were deemed ineffective at March 31, 2022 because of a material weakness in review of debt covenant calculations. A covenant breach at December 31, 2021 was waived by the lender before filing; the company reported Q1 2022 covenant compliance and expected remediation by the end of Q2 2022.
- The company reported no current legal proceedings it considers material. Its Q1 2022 tax recovery was $1.7 million.
Investor verification priorities
- Track whether produce margins recover as management addresses Texas crop yields, disease pressure, freight costs and inflation.
- Assess recurring Canadian cannabis profitability separately from the $2.1 million inventory adjustment and from acquisition-related contributions.
- Monitor cash use, available borrowing capacity, debt maturities and covenant compliance, including progress on the control weakness remediation.
- Verify the revised mid-2023 Delta RNG schedule and any capital or financing commitments if the Leli option is exercised.
- Review how acquisition-related costs and Rose’s non-controlling interest affect reported and adjusted results.