Village Farms International, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unless otherwise noted, amounts are in U.S. dollars; financial statement figures are unaudited and in millions.
Business context and reporting period
Village Farms operates greenhouse produce businesses, Canadian cannabis businesses (Pure Sunfarms and 70%-owned Rose LifeScience), U.S. CBD business Balanced Health, and an energy business. The company reported results across Produce, Cannabis–Canada, Cannabis–U.S., and Energy segments.
Financial performance and liquidity
- Q2 revenue: $77.2 million, down 7% from $82.9 million. Gross profit was $11.5 million, compared with $6.3 million; gross margin improved to approximately 14.9% from 7.6%.
- Q2 earnings: Net loss attributable to Village Farms shareholders was $1.4 million, or $0.01 per share, versus a $36.6 million loss, or $0.41 per share, in Q2 2022. Q2 2023 included $5.6 million of other income, primarily from a favorable legal settlement. Q2 2022 included $29.8 million of impairments.
- First half: Revenue was $141.9 million, down 7%; gross profit was $23.8 million, up from $16.2 million. Net loss was $8.0 million, or $0.07 per share, versus a $43.1 million loss, or $0.49 per share. The 2022 comparison included $29.8 million of impairments and a joint-venture loan write-off.
- Adjusted EBITDA: Non-GAAP adjusted EBITDA was $4.5 million for Q2 and $5.0 million for the first half, versus losses of $10.3 million and $16.4 million, respectively, in 2022. Management attributed much of the improvement to Produce; the measure is not standardized and is not a substitute for GAAP results.
- Cash flow: First-half operating cash use was $5.2 million, investing cash use was $1.7 million, and financing provided $17.0 million. Cash, cash equivalents and restricted cash ended at $31.7 million, including $5.0 million restricted; unrestricted cash was $26.7 million.
- Liquidity and debt: Working capital was $84.9 million, versus $60.8 million at year-end 2022. Debt was $51.0 million of long-term debt plus $4.0 million drawn on the operating line. The company reported covenant compliance at June 30 and management said available liquidity was expected to cover needs for the next 12 months. The largest scheduled principal maturities are $24.8 million in 2025.
- Capital and shares: A January 2023 offering of 18.35 million shares and warrants raised approximately $23.3 million net. Shares outstanding increased to 110.2 million from 91.8 million at December 31, 2022; the warrants have a $1.65 exercise price and expire in 2028.
Material changes versus prior comparable periods
- Produce gross margin improved materially but remained negative: Q2 was negative $2.8 million versus negative $9.0 million; first half was negative $2.1 million versus negative $13.3 million. Management cited improved pricing, greenhouse yields and freight costs, alongside lower volumes and reduced planted area.
- Canadian Cannabis revenue rose 5% in the first half, but Q2 revenue declined 6%. Branded sales grew while non-branded sales fell sharply amid an oversupplied market. Excise taxes rose to $27.7 million in the first half from $20.2 million and remain a significant cost.
- U.S. Cannabis revenue declined 20% in the first half, which the company attributed to lower direct-to-consumer sales and increased competition from hemp-derived cannabinoid products. Lower expenses helped the segment report positive adjusted EBITDA.
- Interest expense increased to $2.5 million for the first half from $1.3 million. Total assets were $489.1 million at June 30, 2023, compared with $465.3 million at year-end 2022.
Outlook, commentary, risks and unusual items
- No quantified revenue or earnings guidance was provided. Management expects the Delta renewable natural gas project to complete construction in August 2023, with commissioning later in Q3; the project was expected to begin operations later in 2023.
- The company began a sale process for its Monahans, Texas greenhouse and expected initial indications of interest in Q3 2023. It also applied for a Texas medicinal cannabis license; any award and acceptable ownership structure remain uncertain.
- Pure Sunfarms extended its loan maturities from February 2024 to February 2026. The company’s operating loan transitioned certain interest-rate references from LIBOR to SOFR.
- Key risks cited include cannabis and CBD regulatory uncertainty, market competition and pricing pressure, Canadian cannabis excise taxes, energy and cultivation costs, inflation, variable interest rates, foreign exchange exposure, financing needs, and potential impairment of goodwill or intangibles.
- Disclosure controls were deemed ineffective at June 30, 2023 because of a previously identified material weakness in controls over goodwill and intangible-asset recoverable-value calculations. Remediation was underway, with completion expected by December 31, 2023.
- The filing states that current legal proceedings are not believed to be material. The favorable Q2 legal settlement contributed to other income; the filing does not provide further settlement detail in the supplied text.
Important facts for investors to verify
- Whether Produce can sustain improved pricing, yields and cost control while its gross margin remains negative.
- Whether cannabis branded-sales growth and international exports can offset non-branded-market pressure, excise taxes and U.S. CBD sales declines.
- The settlement’s nature, amount and any impact on recurring earnings; separate this unusual income from operating performance.
- Cash availability and debt-service capacity, particularly ahead of the 2025 maturities, and compliance with the next FCC covenant test.
- Progress on the RNG project, Monahans greenhouse sale, Texas license application and internal-control remediation.
- The effects of the share issuance and outstanding warrants on future dilution.