Village Farms International, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unless otherwise noted, figures are in U.S. dollars and millions. The company operates produce greenhouses, Canadian cannabis producer Pure Sunfarms, U.S. CBD business Balanced Health Botanicals (BHB), and a clean-energy business. Comparisons are affected by consolidation of Pure Sunfarms beginning November 2020 and BHB beginning August 16, 2021.
Financial performance
- Q3 revenue: $72.4 million, up 68% from $43.0 million. Nine-month revenue: $195.2 million, up 59% from $122.7 million.
- Gross margin: Q3 was $17.7 million, or 25% of revenue, versus $5.6 million, or 13%. Nine-month gross margin was $25.3 million, or 13%, versus $9.9 million, or 8%. Nine-month results included a $1.8 million Pure Sunfarms acquisition-inventory charge and $1.4 million of Texas freeze-related utility costs.
- Net income (loss): Q3 net income was $0.7 million ($0.01 per share), versus $0.5 million ($0.01 per share). Nine-month net loss was $11.2 million ($0.14 per share), versus net income of $4.6 million ($0.08 per share).
- Adjusted EBITDA: $6.8 million in Q3, up from $4.6 million; $8.7 million for nine months, up from $7.9 million. This is a non-GAAP measure and may not be comparable across companies.
- Cash flow: Nine-month operating cash flow was negative $21.1 million, versus positive $4.0 million, primarily reflecting a $20.8 million working-capital outflow. Investing cash outflow was $42.2 million, including acquisition costs and capital expenditures. Financing provided $121.9 million, principally from equity issuance and warrant exercises.
- Liquidity: September 30 cash was $79.2 million, plus $5.3 million restricted cash; working capital was $124.2 million. The operating line of credit had no drawn balance; the company reported covenant compliance.
- Debt: Carrying debt was $63.1 million, including current maturities; the debt-maturity schedule totals $69.2 million. Long-term debt was $52.7 million. The company reported compliance with credit-facility covenants.
Changes and operating drivers
- Canadian cannabis contributed $27.4 million of Q3 sales and $69.6 million for nine months. Pure Sunfarms reported Q3 gross margin of $13.1 million and net income of $5.3 million; branded sales and production yields improved. Nine-month cannabis net income was lower than the prior year partly because 2020 included a one-time settlement gain.
- BHB contributed $3.8 million of sales from its August 16 acquisition through September 30, with a reported 68% gross margin. The acquisition was funded with approximately $30 million cash and shares valued at about $42 million; preliminary purchase accounting remains subject to revision.
- Produce revenue declined year over year. Tomato pricing was pressured by industry oversupply and changing retailer purchasing, while Texas crop volumes were affected by tomato viruses and greenhouse clean-outs. The company also cited the February 2021 Texas freeze.
- Equity issuance and warrant exercises strengthened cash but increased the share count. The company issued 10.9 million shares in a January offering and 4.7 million shares as BHB consideration; 3.2 million warrants were exercised during the first nine months.
Outlook, commentary, and risks
- The filing provides no quantified consolidated revenue or earnings guidance. Management said working capital, operating cash flow and, if needed, additional debt or equity financing were expected to fund operations, maintenance and investment needs over the next 12 months.
- Pure Sunfarms’ Delta 2 greenhouse conversion was underway: the first harvest was anticipated in early December 2021, with full production expected in 2022.
- Permitting and zoning delays pushed the Delta renewable natural gas project’s expected regulatory approvals to early 2022 and anticipated startup to 2023, later than the previously expected 2022 startup.
- The company obtained a five-year option to acquire 80% of Dutch cannabis business Leli, subject to exercise and project milestones; the opportunity depends on regulatory approvals and development of the Dutch supply-chain program.
- Principal risks include volatile produce and cannabis pricing, tomato viruses and agricultural conditions, energy costs, integration and growth execution, cannabis and CBD regulation, customer credit, competition, access to U.S. banking services, product liability, foreign-exchange and interest-rate exposure, and continuing uncertainty from COVID-19. Management said operations were functioning normally at the time of filing.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing describes only routine legal proceedings, none believed material.
Investor verification priorities
- Confirm the drivers and durability of produce pricing, yields, and margins, including the effect of tomato-virus mitigation and the Texas freeze.
- Track operating cash flow and working-capital needs, particularly the inventory and receivables build, against cash and available credit.
- Review Pure Sunfarms’ Delta 2 ramp-up and the timing, permitting, financing, and economics of the Delta RNG project.
- Check final BHB purchase-price allocation and goodwill: the filing’s acquisition accounting is preliminary, with $69.3 million of preliminary goodwill.
- Assess debt maturities, covenant headroom, interest-rate exposure, and potential future share issuance or dilution.
- Distinguish GAAP results from Adjusted EBITDA and account for acquisition-related consolidation and one-time inventory, settlement, and storm items when comparing periods.