Village Farms International, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2020; amounts are in U.S. dollars, in thousands, unless stated otherwise. Village Farms operates greenhouse produce and energy businesses and holds interests in cannabis and hemp joint ventures. Pure Sunfarms (PSF), in which Village Farms held 58.7%, is accounted for under the equity method; its sales are not included in consolidated revenue.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Sales | $47,573 | $41,329 | $79,685 | $73,219 |
| Gross margin | $3,529 | $(2,970) | $4,294 | $(2,295) |
| Net income (loss) | $(119) | $3,716 | $4,071 | $10,182 |
| Adjusted EBITDA | $2,268 | $4,644 | $3,364 | $5,990 |
| Operating cash flow | Not separately presented | Not separately presented | $2,145 | $(9,437) |
- Consolidated gross margin was approximately 7.4% in Q2 and 5.4% in the first half, versus negative margins in the comparable 2019 periods.
- At June 30, cash was $9,568; working capital was $24,788. Total assets were $197,941 and total liabilities were $59,210.
- Debt included a $29,766 term loan, $4,000 drawn on the operating line, and approximately $965 of VFCE loans. The operating line had a stated limit of C$13 million. The company reported compliance with its other credit-facility covenants; a prior waiver and an August covenant amendment are noted.
- Investing cash outflow was $12,290, including $11,713 invested in joint ventures. Financing cash inflow was $7,725. Cash declined by $2,421 during the first half.
Material changes versus the prior period
- Consolidated Q2 sales rose 15.1%, primarily as higher tomato prices—supported by supply shortages and increased grocery traffic—more than offset lower cucumber volume. First-half sales rose 8.8%, with production shortfalls tempering price gains.
- PSF’s Q2 revenue fell 61.3% to $9,386 and its first-half revenue fell 35.7% to $22,523. Management attributed the declines mainly to lower cannabis prices and a shift from wholesale toward provincial retail sales, which also carry higher packaging and logistics costs. PSF first-half gross margin fell to 44.4% from 77.8%.
- Village Farms’ equity earnings from unconsolidated entities declined to $350 in Q2 from $7,985, and to $3,579 for the first half from $10,593. As a result, Q2 consolidated net income turned to a $119 loss despite stronger produce sales.
- First-half results included a $4,681 company gain on a settlement agreement; the prior-year period included a $13,564 gain on contribution of Delta 2 assets to PSF. These unusual items affect period comparisons.
- Common shares outstanding increased to 56.4 million at June 30 from 52.7 million at year-end, including shares issued in a March public offering.
Outlook, commentary, risks and unusual items
- Management said operations were functioning normally amid COVID-19 and that it continued servicing customers while actively managing the business. It cautioned that the pandemic’s duration and effects on customers, vendors, employees, and markets remained uncertain.
- The company expected to fund operations, working capital, property improvements, and PSF investment over the following 12 months from operating cash flow and, as needed, credit facilities or additional equity. No quantified earnings or revenue guidance was provided.
- Key disclosed risks include produce and cannabis pricing, agricultural and operational risks, regulatory approvals and compliance, financing needs and credit covenants, interest and foreign-exchange exposure, and COVID-19. PSF debt is secured by its Delta facilities; Village Farms provided a limited C$10 million guarantee. The company also disclosed a $10,841 loan to VF Hemp and a $10,661 amount due from joint ventures.
- Village Farms reported no material legal proceedings and no off-balance-sheet arrangements. Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly named measures from other companies.
Most important facts for investors to verify
- Whether produce pricing and volumes can sustain the improved consolidated gross margin, particularly if COVID-related supply and demand conditions change.
- PSF’s realized prices, channel mix, returns and allowances, and progress converting sales growth into earnings and cash generation.
- Liquidity and covenant headroom, upcoming debt maturities, the operating line’s availability, and the company’s ability to fund planned investments without further dilution.
- Recoverability of joint-venture loans and investments, including VF Hemp’s losses, and the scope of guarantees or other commitments.
- The recurring earnings picture after excluding the 2020 settlement gains and the 2019 asset-disposal gain; also review the company’s non-GAAP reconciliations.