Village Farms International, Inc. quarterly report, Q2 FY2021

Village Farms International, Inc. — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted. Village Farms operates cannabis, produce and energy businesses. Pure Sunfarms has been wholly owned and consolidated since November 2, 2020, affecting year-over-year comparability.

Financial performance and liquidity

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Sales	$70.4	$47.6	$122.8	$79.7
Gross margin	$5.3 (7%)	$3.5 (7%)	$7.6 (6%)	$4.3 (5%)
Net income (loss)	$(4.5)	$(0.1)	$(11.9)	$4.1
Adjusted EBITDA (non-GAAP)	$1.5	$2.3	$2.0	$3.4
Operating cash flow	Not separately stated	Not separately stated	$(15.2)	$2.1

Q2 sales rose 48%, primarily because Pure Sunfarms contributed $24.8 million of consolidated revenue. Six-month sales increased 54% for the same principal reason.
Produce faced a severe tomato-price downturn: the average selling price of Village Farms’ own tomatoes fell 42% year over year in Q2 and 30% over the first half. Q2 produce segment gross margin was negative $3.8 million; cannabis gross margin was $9.8 million.
Management reported Q2 gross margin of approximately 10% excluding $1.4 million of Texas storm-related electricity costs and $0.1 million of Pure Sunfarms acquisition-inventory accounting charges. For the first half, it reported approximately 10% excluding $1.4 million and $3.1 million, respectively. These are management-adjusted figures.
Cash and cash equivalents were $114.0 million at June 30, versus $21.6 million at year-end; restricted cash was an additional $9.2 million. Working capital was $155.2 million, compared with $29.5 million at year-end.
Debt carrying value totaled $65.5 million, including $10.9 million of current maturities and $54.6 million of long-term debt. The $10 million Canadian-dollar operating credit line was undrawn. The company reported compliance with credit-facility covenants.
First-half investing cash outflow was $12.4 million, including $11.4 million in capital expenditures, principally for Pure Sunfarms’ Delta 2 conversion. Financing provided $124.6 million, including equity-offering proceeds and warrant exercises. The cash-flow statement reports period-end cash, including restricted cash, of $123.2 million.

Material changes versus the prior comparable period

Pure Sunfarms’ consolidation materially increased reported revenue and costs; comparisons with 2020 are not fully like-for-like. Its Q2 sales were $24.8 million, up from $9.4 million, and its Q2 net income was $3.2 million, versus $0.8 million. Six-month net income fell to $0.4 million from $7.0 million, including because 2020 contained a $4.3 million settlement-related gain.
Despite higher consolidated sales, Village Farms’ Q2 net loss widened to $4.5 million from $0.1 million, and first-half results shifted from $4.1 million income to an $11.9 million loss. Management cited weaker produce results, higher corporate and share-based compensation costs, and accelerated depreciation in clean energy.
First-half operating cash flow shifted from a $2.1 million inflow to a $15.2 million outflow, including a $10.2 million use of non-cash working capital. The January 2021 share offering and warrant exercises substantially increased liquidity and shares outstanding.

Outlook, risks and unusual items

Pure Sunfarms received an amended cultivation license for the completed half of its 1.1-million-square-foot Delta 2 greenhouse. It expected planting to begin in September 2021 and the first harvest in November 2021.
The Delta renewable natural gas project’s expected startup moved from as early as the first half of 2022 to as early as fall 2022, with regulatory approvals then anticipated in fall 2021. Management attributed permitting and zoning delays to COVID-19 disruptions.
The February 2021 Texas winter storm led to $1.4 million of incremental electricity expense, invoiced and paid in Q2. Management said the freeze did not damage operations or crops. The company began fixed-price winter electricity contracts for a significant portion of expected Texas power needs and was reassessing backup capacity.
Key risks include produce and cannabis pricing and demand, agricultural and crop risks, licensing and regulatory requirements, financing and covenant restrictions, energy costs, foreign exchange, competition, and COVID-19 effects. The company reported no material change to previously disclosed risk factors and no legal proceedings it considered materially adverse.
There was no specific financial guidance in the supplied filing text. Management said it expected to fund the next twelve months’ needs from working capital and operating cash flows, with borrowing or additional equity or debt financing available if needed. This is a forward-looking statement, not a guarantee.
Other notable items: a $135 million gross registered offering in January; 3.19 million warrants exercised for approximately $18.5 million in the first half; and 428,097 shares repurchased for $4.0 million through June 30. The NCIB permitted purchases of up to 4.06 million shares through May 25, 2022.

Important facts for investors to verify

How produce pricing and margins recover after the unusually weak tomato market, and whether the reported late-Q2 pricing improvement persists.
Pure Sunfarms’ Delta 2 planting, harvest timing, production yields and margins, including the effect of acquisition-inventory charges and product mix.
Whether operating cash flow improves as working-capital requirements and capital spending evolve; distinguish unrestricted cash from restricted cash.
Debt maturity and covenant terms, and the timing and funding of Delta 2 upgrades and the renewable natural gas project.
Share dilution from the 2021 offering, remaining warrants and equity compensation, weighed against the pace and cost of repurchases.
The $3.3 million note receivable from VF Hemp and the company’s disclosed exposure to repayment; the filing states the joint venture continues to record losses.