Village Farms International, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited financial statements are in U.S. dollars; figures below are in millions unless noted.
Business context
Village Farms operates greenhouse produce businesses in the U.S. and Canada, Canadian cannabis businesses Pure Sunfarms and Rose LifeScience, U.S. CBD business Balanced Health, and an energy business. Comparisons are affected by the 2021 acquisitions of Balanced Health and Rose; Rose is consolidated at 70% ownership. The company acquired an 85% interest in Dutch cannabis venture Leli in July 2022.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $71.1 | $72.4 | $224.1 | $195.2 |
| Gross margin | $8.4 (12%) | $17.7 (25%) | $24.6 (11%) | $25.3 (13%) |
| Net income (loss) attributable to Village Farms | $(8.7) | $0.7 | $(51.8) | $(11.2) |
| Adjusted EBITDA | $(2.2) | $6.9 | $(18.4) | $9.2 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(13.2) | $(21.1) |
Adjusted EBITDA is a non-GAAP measure and may not be comparable with similarly named measures used by other companies. Nine-month net loss included $29.8 million of U.S. cannabis goodwill and intangible-asset impairments, a $0.6 million write-off of a joint-venture loan, and a $14.6 million income-tax recovery.
At September 30, cash and cash equivalents were $18.2 million, plus $5.0 million restricted cash; working capital was $64.4 million. Long-term debt was $54.3 million and the balance-sheet line of credit was $7.7 million. Total assets were $511.3 million and total liabilities were $152.1 million. Cash and cash equivalents declined from $58.7 million at December 31, 2021. Nine-month investing cash outflow was $19.5 million, including $12.9 million of capital expenditures.
Material changes and segment trends
- Q3 sales decreased 2% year over year, as produce sales fell and growth in both cannabis segments, including acquired businesses, partly offset the decline. Nine-month sales increased 15%, reflecting acquired businesses and growth across produce and cannabis.
- Q3 gross margin fell to $8.4 million from $17.7 million. Produce recorded a $3.3 million gross loss, versus $2.1 million of gross profit a year earlier; Canadian cannabis gross margin declined to $8.2 million from $13.1 million. Management cited lower produce volumes and pricing, inflation and freight costs, Canadian cannabis price compression and a greater branded-product mix. Rose purchase-accounting amortization also reduced Q3 Canadian cannabis results.
- For the first nine months, produce generated a $16.6 million gross loss, compared with a $1.0 million loss in 2021. Management cited tomato brown rugose fruit virus (ToBRFV), higher cultivation and freight costs, supply-chain inflation, and lower crop yields. Canadian cannabis gross margin was $29.2 million, up from $25.2 million, but Adjusted EBITDA declined to $10.6 million from $19.0 million amid higher selling and administrative costs. U.S. cannabis sales were $18.0 million for the nine months; its results included the impairment charges and VF Hemp losses.
- Foreign-exchange losses were $2.0 million in Q3 and $2.2 million for the nine months. The stronger U.S. dollar reduced reported Canadian cannabis sales and gross margin.
Outlook, risks and unusual items
- Management said existing cash, operating cash generation, credit facilities and potential ATM proceeds were expected to meet working-capital needs, debt repayments, contractual obligations and planned capital expenditures for the next 12 months. This is management’s expectation, not assurance of future liquidity.
- The company reported compliance with credit-facility covenants at September 30, 2022. It disclosed a prior-year covenant violation that was waived by the lender, and cautioned that compliance or a waiver at the next annual test, December 31, 2022, was not assured. Short-term borrowing rates had risen to a weighted average of 7.95% from 5.15% at year-end 2021.
- The Delta RNG project was under construction; management expected commercial start-up in mid-2023 after permitting delays. The Dutch cannabis experiment was anticipated to begin by 2024, but the program remained subject to delays.
- The company cited inflation, labor and freight costs, supply-chain disruptions, consumer-demand uncertainty, ToBRFV, cannabis price competition and oversupply, CBD regulatory uncertainty, foreign exchange, interest rates, and regulatory and licensing risks. VF Hemp was not cultivating while awaiting FDA clarity on CBD use.
- Disclosure controls and procedures were assessed as ineffective at September 30, 2022 because of a material weakness in debt-covenant calculation review. The company reported adding independent review and hiring a Corporate Treasurer as remediation measures.
- After quarter-end, the company continued its ATM share sales. By October 31, it had sold 1.69 million additional shares for $3.48 million net proceeds since September 30; $45.27 million remained available under the program.
Key facts for investors to verify
- Whether produce yields, pricing, and margins recover from ToBRFV impacts and elevated cultivation and freight costs.
- Whether Canadian cannabis price compression and rising sales and administrative costs stabilize, and how Rose contributes to earnings and cash generation.
- Whether liquidity and covenant compliance remain adequate, including the December 31, 2022 covenant test, debt maturities, interest costs, and further ATM dilution.
- Whether the mid-2023 Delta RNG start-up and the delayed Dutch cannabis program proceed on management’s stated timelines.
- Whether CBD demand and regulation support Balanced Health’s outlook and whether further impairment indicators arise; also monitor remediation of the disclosed internal-control weakness.