Village Farms International, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial amounts are in U.S. dollars; amounts below are in millions unless otherwise stated. The filing is unaudited. Village Farms grows greenhouse produce, operates an energy business, and held equity-method interests in Pure Sunfarms (cannabis) and VF Hemp during the reporting period.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $43.0 | $38.3 | $122.7 | $111.5 |
| Gross margin | $5.6 (13.1%) | $(0.6) (-1.6%) | $9.9 (8.1%) | $(2.9) (-2.6%) |
| Net income (loss) | $0.5 | $(0.7) | $4.6 | $9.5 |
| Adjusted EBITDA, non-GAAP | $4.6 | $2.9 | $7.9 | $8.3 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $4.0 | $(7.9) |
Q3 sales increased 12.4%, chiefly from higher produce prices, especially tomatoes; nine-month sales rose 10.1%. Produce gross margin improved as selling prices increased and costs fell. Nine-month net income declined despite improved produce results, reflecting lower equity earnings from Pure Sunfarms and the absence of the prior-year $13.6 million gain on contribution of Delta 2 assets; 2020 included a $4.7 million settlement gain.
Pure Sunfarms’ sales and expenses were not consolidated in these results: Village Farms reported its share of earnings under the equity method. Q3 and nine-month equity earnings from unconsolidated entities were $1.3 million and $4.9 million, versus $3.5 million and $14.1 million, respectively, in 2019. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
Liquidity, cash flow, and debt
- At September 30, 2020, cash was $54.7 million and working capital was $70.0 million, compared with cash of $12.0 million at December 31, 2019.
- Nine-month cash flows: $4.0 million provided by operations, $14.1 million used in investing, and $52.8 million provided by financing. Financing included equity offering proceeds; investing included $11.7 million invested in Pure Sunfarms and $1.2 million in minority investments.
- Balance-sheet long-term debt, including current maturities, was approximately $30.1 million; the operating line of credit had $3.0 million drawn. The FCC term loan balance was $29.2 million, with a 4.388% rate and maturity in April 2025. The operating line’s maturity was May 2021.
- The company reported compliance with its other credit-facility covenants at September 30, 2020; it had previously received a waiver for specified FCC loan covenants and amended term-loan covenants in 2020. Debt is secured by specified greenhouse assets and other collateral.
Material developments, outlook, and risks
- Pure Sunfarms acquisition after quarter-end: On November 2, 2020, Village Farms acquired Emerald’s remaining 41.3% interest, bringing ownership to 100%. Consideration was C$79.9 million (about $60.0 million): C$60.0 million (about $45.0 million) cash and a C$19.9 million (about $14.5 million) secured note due May 2, 2021. Village Farms said the transaction would be immediately accretive and will fully consolidate Pure Sunfarms from the closing date.
- In connection with the acquisition, Village Farms increased its guarantee of Pure Sunfarms’ credit facility to C$20 million. Pure Sunfarms had C$35.0 million outstanding on its facility at September 30, 2020.
- A September registered direct offering issued 9.4 million units, each comprising one share and half a warrant, at $5.30 per unit. Net proceeds after placement-agent fees were approximately $46.8 million before estimated offering expenses; about $37.5 million was used to finance the Pure Sunfarms transaction. Shares outstanding rose to 66.0 million at September 30 from 52.7 million at year-end.
- Pure Sunfarms’ Q3 gross margin fell year over year to 34.6% from 68.5%, amid lower wholesale prices, a shift toward retail sales and a $1.0 million write-down of purchased distillate inventory. Its nine-month sales and net income also declined year over year. These results are not consolidated in Village Farms’ Q3 statements.
- Management said operations were functioning normally amid COVID-19, but the pandemic’s duration and effects on customers, suppliers, employees, and markets remained uncertain. Risks also include produce price and supply variability, cannabis licensing and regulation, hemp regulatory uncertainty in the U.S., financing and covenant requirements, foreign exchange and interest-rate exposure, and recovery of loans to joint ventures.
- Management expected adequate financing for the next 12 months from operating cash flows and, as needed, credit facilities or additional equity or debt financing. No quantified earnings guidance was provided. The company also announced a planned transition of its 7 MW energy operation to renewable natural gas with Mas Energy; the filing does not quantify the expected financial impact.
Important facts for investors to verify
- Post-acquisition performance, integration, and the basis and timing of full Pure Sunfarms consolidation.
- Ability to meet the May 2021 Emerald note, maintain liquidity, and comply with facility covenants after the acquisition and increased guarantee.
- Whether Pure Sunfarms can restore margins after lower wholesale pricing, retail product-mix costs, and the distillate inventory write-down.
- Cash generation relative to continued investment needs, including Delta 2 conversion and joint-venture exposures; assess the collectability of the $10.7 million VF Hemp loan.
- Effects of COVID-19, cannabis and hemp regulation, commodity pricing, and foreign exchange on operations and results.