Village Farms International, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated financial statements are presented in U.S. dollars, in thousands except per-share data. The company operates greenhouse produce and energy businesses and holds interests in cannabis and hemp joint ventures, including 58.7% of Pure Sunfarms (PSF), accounted for under the equity method.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Sales | $32.112 million | $31.890 million |
| Gross margin | $0.765 million (2.4% of sales) | $0.675 million (2.1% of sales) |
| Net income | $4.190 million | $6.466 million |
| Basic / diluted EPS | $0.08 / $0.08 | $0.14 / $0.13 |
| Adjusted EBITDA | $1.096 million | $1.344 million |
| Cash from operating activities | $(0.535) million | $(5.546) million |
| Cash from investing activities | $(6.322) million | $(2.365) million |
| Cash from financing activities | $8.428 million | $2.179 million |
Cash and cash equivalents were $13.558 million at quarter-end, up from $11.989 million at December 31, 2019. Current assets were $50.499 million and current liabilities $20.536 million. Total assets were $193.598 million; total liabilities were $55.224 million.
Debt included a $30.428 million FCC term loan and a $4.000 million operating line draw, plus VFCE borrowings. The company reported compliance with its other credit-facility covenants; a waiver for specified term-loan covenants had been obtained in December 2019. The FCC loan was renewed after quarter-end, extending maturity to April 1, 2025, with a variable rate of 4.574% effective May 1, 2020.
Material changes versus the prior period
- Sales increased 1%, but consolidated net income fell 35% and Adjusted EBITDA declined 18% year over year.
- Results include a $4.681 million settlement-agreement gain in Q1 2020. Q1 2019 included a $13.564 million gain on contribution of Delta 2 assets to PSF. These unusual items make the headline earnings comparison less representative of underlying operations.
- Produce sales were affected by an 18% decline in own-production volume attributed to plant disease at Texas facilities. Higher tomato prices partly offset the volume impact; pepper pounds sold fell 49% while prices rose 22%.
- PSF revenue increased 21.6% to $13.137 million, with reported net income of $6.165 million versus $4.403 million. It sold more volume, but its average sales price fell to $1.27 per gram from $2.61; PSF Adjusted EBITDA, excluding a one-off settlement gain, decreased to $4.868 million from $6.451 million.
- The March public offering issued 3,593,750 shares and generated approximately $7.3 million net proceeds in the financial statements. Shares outstanding rose to 56,250,419 at March 31 from 52,656,669 at year-end.
Cash flow, outlook, risks and unusual items
- Operating cash use improved from the prior-year quarter, while investing outflows increased principally because of a $6.063 million contribution to PSF. Financing inflows included the share offering and net borrowings.
- In April, PSF expanded its credit facility to C$59 million, including accordion provisions of C$22.5 million. Village Farms made a further C$8 million contribution on April 2 and had guaranteed up to C$10 million of PSF borrowing. Further contributions could be required, including under facility conditions described in the filing.
- Management said company and PSF cultivation operations were operating, and the company continued serving customers, but it could not assess the COVID-19 pandemic’s eventual effect on operations or future results. No quantitative earnings guidance was provided; management cautioned that Q1 results may not indicate full-year performance and noted seasonality.
- Other material risks include continued Texas crop disease pressure, commodity pricing and supply variability, energy costs, regulatory and licensing requirements for cannabis and hemp, foreign-exchange and interest-rate exposure, and the ability of joint ventures to generate cash and repay amounts due.
- Village Farms reported a $10.946 million loan to VF Hemp; VF Hemp recorded a quarterly loss and has negative net assets. The company identified the loan’s recovery as its primary exposure to that venture. PSF investment carrying value was $55.607 million, with a further $9.959 million loan outstanding.
- The filing describes only routine legal proceedings and says none are expected to have a material adverse effect. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Cash-flow presentation note: The condensed cash-flow statement reports operating cash use of $535,000 and investing cash use of $6.322 million. A later MD&A summary gives different figures ($419,000 and $6.438 million); investors should reconcile this inconsistency against the filed statements.
Important facts for investors to verify
- Underlying produce profitability and whether Texas disease-related volume losses persist or improve.
- PSF’s realized pricing, margins, retail-channel growth, and cash generation apart from the settlement-related gain.
- Funding requirements and potential further contributions or guarantees related to PSF’s expanded facility.
- Collectability of the VF Hemp loan and progress toward financial viability of the hemp venture.
- Debt refinancing terms, covenant requirements, and liquidity needs through the remainder of 2020.
- The financial and operational effects of COVID-19, which management said could not yet be reliably quantified.