Village Farms International Reports Third Quarter 2020 Financial Results – Pure Sunfarms Delivers Seventh Consecutive Profitable Quarter, Nearly Tripling Net Income Sequentially on a 75% Sequential Net Sales Increase as Produce Business Continues Strong Performance
– Pure Sunfarms Brand Achieves 15.2% Dried Flower Market Share (by Volume) with OSC in October –
VANCOUVER, BC, Nov. 13, 2020 /PRNewswire/ – Village Farms International, Inc. (“Village Farms” or the “Company”) (NASDAQ: VFF) (TSX: VFF) today announced its financial results for the three and nine months ended September 30, 2020. All figures are in U.S. dollars unless otherwise indicated.
The Company’s financial statements for the three and nine months ended September 30, 2020, as well as the comparative periods for 2019, have been prepared and presented under United States Generally Accepted Accounting Principals (“GAAP”). On September 30, 2020, Village Farms had a majority (non-controlling) interest of 58.7% of Pure Sunfarms Corp. (“Pure Sunfarms”), as the full acquisition of the remaining interest in Pure Sunfarms did not occur till November 2, 2020. Accordingly, Pure Sunfarms results are not consolidated for the third quarter.
Pure Sunfarms’ Third Quarter and Other Recent Highlights
(Dollar Amounts are Before Village Farms’ Proportionate Share)
- Achieved significant sequential quarterly growth in key financial metrics for the third quarter of 2020 compared to the second quarter of 2020:
- Net sales increased 75% to C$22.6 million;
- Net sales to provincial buyers (retail) increased 30% to C$12.0 million;
- Gross profit increased 81% to C$7.8 million;
- Net income increased 200% to C$3.2 million; and
- Adjusted EBITDA increased 125% to C$5.6 million.
- Achieved 15.2% brand market share of the dried flower category (by kilograms sold) in October 2020 with the Ontario Cannabis Store (“OCS”)*;
- Remained the top-selling brand of dried flower products with the OCS (by kilograms sold and dollars sold) for the year-to-date ended October 31, 2020, with a market share of 13.6% (by kilograms sold)*;
- Launched its first Cannabis 2.0 products, specifically Full Spectrum Vapes in 510 Thread Cartridges and first bottled oil products, in September 2020; and,
- Received an amendment to its standard cannabis processing license from Health Canada permitting internal extraction operations, which are currently ramping up.
*Data cited has been calculated by Pure Sunfarms from sales information provided by OCS.
Village Farms’ Financial Summary for the Three and Nine Months Ended September 30, 2020 and Corporate Highlights
- On November 2, 2020 (subsequent to quarter end), the Company acquired all issued and outstanding shares of Pure Sunfarms, as a result of which the Company now wholly owns 100% of Pure Sunfarms;
- In September 2020, the Company completed a registered direct offering of 9,396,226 units at a purchase price of US$5.30 per unit with certain institutional investors for gross proceeds of approximately $49.8 million, of which a portion of the proceeds were used to finance the Pure Sunfarms acquisition;
- The Company initiated its international cannabis strategy with investments in Australia-based Altum International Pty Ltd, one of Asia-Pacific’s leading cannabinoid platforms, and DutchCanGrow, a Netherlands-based cannabis enterprise pursuing the opportunity to become one of a limited number of licensed cannabis growers when the Dutch government permits the first legal recreational cannabis market in Europe; and
- Subsequent to quarter end, the Company’s wholly owned subsidiary, Village Farms Clean Energy, Inc. (“VFCE”), renewed and extended its existing contract with the City of Vancouver under which VFCE receives landfill gas captured by the City of Vancouver at the City’s landfill site in Delta, BC, enabling the transition of VFCE to a more attractive long-term business model based on the conversion of landfill gas to high-demand Renewable Natural Gas.
Pure Sunfarms’ Financial Summary for the Three and Nine Months Ended September 30, 2020 (Before Village Farms’ Proportionate Share)
Pure Sunfarms’ Percent of Sales by Product Group
Management Commentary
With 75% sequential growth in dollar sales, Pure Sunfarms’ third quarter highlighted its strong sales momentum as its leading brand continues to resonate with consumers. Importantly, this sales momentum was achieved with only a small contribution from Pure Sunfarms’ Cannabis 2.0 and bottled oil products, which were launched late in the quarter.
Michael DeGiglio, CEO, Village Farms
Pure Sunfarms’ third quarter results are yet further evidence of its earnings power, based on our unique approach to the cannabis industry, with net income nearly tripling from the second quarter of this year, marking Pure Sunfarms seventh consecutive quarter of profitability. It is an achievement that is unmatched in our industry, and further underscores the significant value in acquiring the entirety of Canada’s premier cannabis company.
Mr. DeGiglio added, “The deep experience and organizational strength underlying our legacy produce business, which delivered another solid quarter, combined with our proven cannabis capabilities provides Village Farms with a rock-solid foundation as we transform to a vertically integrated, agriculturally-based CPG business to aggressively pursue high-growth opportunities in emerging legal cannabis and related markets in the United States and other targeted markets. There is no cannabis supplier in Canada or the U.S. with our combination of experience, capabilities and more than ten million square feet of greenhouse assets, and we are encouraged by the evolving regulatory environment in the U.S. and are developing multiple strategies to capitalize on any favourable U.S. regulatory developments in 2021. We will pursue these opportunities with prudent, disciplined capital allocation and focus on return on invested capital.”
COVID-19 Update
All Village Farms’ production facilities in Texas, British Columbia, and Pure Sunfarms’ facilities in Canada remain open and operational. The Company has experienced a small number of COVID-19 illnesses at its facilities, however, the Company’s protocols were followed and there has been no material disruption to operations. Village Farms and Pure Sunfarms adhere to the highest health and safety standards in their operations and each has put in place heightened hygiene practices and safety protocols, including more stringent cleaning and sanitization, and are taking appropriate precautions throughout all operations as per the recommendations of health authorities. The Company will continue to enhance and evolve such practices and protocols as the situation warrants.
Summary Statutory Results
(in thousands of U.S. Dollars unless otherwise indicated)
Pure Sunfarms (in C$)
Three months ended September 30, 2020 compared to the three months ended June 30, 2020.
Sales
Sales for three months ended September 30, 2020 increased to $22,627 as compared to $12,902, or a 75% quarter on quarter increase from the three months ended June 30, 2020 sales . The increase was primarily driven by a 148% increase in sales in the wholesale channel, a 30% quarter on quarter increase in sales to provincial (retail) boards and the September launch of Pure Sunfarms Cannabis 2.0 derivative products, which includes cannabis oil and vape pens. The quarter on quarter growth in retail sales is directly attributable to a 165.7% increase in Pure Sunfarms retail small format, a 29.7% quarter on quarter increase in pre-rolls and a (42.7%) decrease in Pure Sunfarms retail large format, as the large format was launched in the second quarter of 2020 and the third quarter retail large format sales consisted of ongoing replenishment sales.
The channel makeup of the third quarter sales was 53% to the retail channel and 47% to the wholesale channel. The channel makeup of the second quarter sales was 69% to the retail channel and 31% to the wholesale channel. Cannabis 2.0 derivative products were 4.5% of third quarter sales, which are included in the retail channel.
The net average selling price for the three months ended September 30, 2020 was higher than the net average selling price for the three months ended June 30, 2020 by 13.3% due to an increase in small format retail sales versus large format retail sales, a quarter on quarter increase in the sales price of retail flower SKUs and a slight increase in wholesale pricing, which is impacted by the makeup of the potency of flower biomass sold to various wholesale customers.
Cost of Sales
Cost of sales for the three months ended September 30, 2020 and three months ended June 30, 2020 was $14,826 and $8,594, respectively, an increase of 73%. The third quarter of 2020 cost of sales includes an inventory write down of ($1,412) for distillate inventory purchased from third party extraction companies for which the market value has dropped since the initial purchase. The quarter on quarter increase in costs excluding the distillate inventory write down was 56%, primarily due to a 143% increase in wholesale kilograms sold, a 120% increase in retail small format kilograms sold which has higher overhead and labor cost compared to retail large format, and the launch of recently approved Cannabis 2.0 products which was co-manufactured by another licensed producer.
Gross Margin
Gross margin for the three months ended September 30, 2020 and three months ended June 30, 2020 was 34.5% and 33.2%, respectively, excluding the distillate inventory write down the third quarter gross margin was 40.7%. The quarter on quarter improvement was due to an increase in wholesale sell price and an increase in small format retail flower sales as compared to higher sales of Pure Sunfarms retail large format products in the second quarter of 2020, which have a lower gross margin.
Net Income
Net income for the three months ended September 30, 2020 and three months ended June 30, 2020 was $3,240 and $1,079 respectively, an increase of 200%. The increase was primarily due to the increase in gross margin.
Adjusted EBITDA
Adjusted EBITDA for the three months ended September 30, 2020 increased 125% to $5,642 from $2,509 for the second quarter. The third quarter Adjusted EBITDA figure includes the third-party distillate inventory write down of ($1,412).
Pure Sunfarms (in C$)
Three months ended September 30, 2020 compared to the three months ended September 30, 2019.
Sales
Sales for the three months ended September 30, 2020 and 2019 was $22,627 and $23,953, respectively, a decrease of (5.5%). The change was due to 362% increase in provincial (retail) sales and (51.6%) decrease in wholesale selling price for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The net average selling price of retail flower for the three months ended September 30, 2020 was lower than the net average selling price for the three months ended September 30, 2019 by (35.8%).
Cost of Sales
Cost of sales for the three months ended September 30, 2020 and 2019 was $14,826 and $7,536, respectively, an increase of 97%. The third quarter 2020 cost of sales includes an inventory write down of ($1,412) for distillate inventory purchased from their third-party extraction companies for which the market value has dropped since the initial purchase. The year on year increase in costs excluding the distillate inventory write down was 78%, primarily due to a 553% increase in retail kilograms sold which require incremental packaging, overhead and logistics expenses compared to product sold through the wholesale channel, as well as higher depreciation expense charge (a year on year increase of 91%).
Gross Margin
Gross margin for the three months ended September 30, 2020 and 2019 was 34.5% and 68.5%, respectively. The decline was due to the ($1,412) inventory write down for distillate inventory in 2020, a lower price environment for the wholesale channel in 2020 as compared to the third quarter of 2019, as well as an increase in costs as a result of Pure Sunfarms’ increase in provincial (retail) sales in 2020, as the majority of sales in the third quarter of 2019 were made through the wholesale channel.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2020 and 2019 were $3,261 and $3,741, respectively, a decrease of 12.8%. The decrease was primarily due to wage subsidies received from the Government of Canada as a result of the federal COVID-19 program. Without the subsidy, the year on year selling, general and administrative expenses were essentially flat.
Net Income
Net income for the three months ended September 30, 2020 and 2019 was $3,240 and $8,860 respectively, a decrease of (63.4%). The decrease was primarily due to the decrease in gross margin.
Adjusted EBITDA
Adjusted EBITDA for the three months ended September 30, 2020 declined (57.7%) to $5,642 from $13,352 for the same prior year period. The decrease was primarily due to the decrease in gross margin.
Produce (in US$)
Three months ended September 30, 2020 compared to the three months ended September 30, 2019.
Sales
Produce sales for the three months ended September 30, 2020 increased $4,744, or 12.4%, to $43,037 compared to $38,293 for the three months ended September 30, 2019. The improvement in sales is due to an increase in pricing for tomatoes during the three months ended September 30, 2020 compared to the same prior year period. The average net selling price for total tomato pounds sold increased 30% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, generated primarily from our commodity items, which includes beefsteak tomatoes and tomatoes on the vine (“TOVs”). The increase in net selling price in the commodity items was primarily the result of a supply shortage throughout most of 2020, due to an increase in grocery store traffic, driven by COVID-19 measures, as well as a global tomato virus that is negatively impacting tomato supplies. Pepper prices increased 19% and pepper pounds sold increased 47% when compared to the same prior year period, due to an increase in our third-party pepper contracts. Cucumber prices increased 1% and cucumber pieces sold decreased (12%) for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.
Cost of Sales
Cost of sales for the three months ended September 30, 2020 decreased ($1,486), or (3.8%), to $37,418 from $38,904 for the three months ended September 30, 2019, as the Company produced less tomatoes at its facilities in the third quarter of 2020 compared to the same period in 2019 due to the transition of the Delta 2 facility, which converted from tomato production in 2019 to cannabis production for Pure Sunfarms in 2020.
Adjusted EBITDA
Adjusted EBITDA for the three months ended September 30, 2020 increased $4,168 to $2,223 from ($1,945) for the three months ended September 30, 2019 due primarily to an increase in gross margin, partially offset by an increase in selling, general and administrative expenses. See the reconciliation of Adjusted EBITDA to net income in “Non-GAAP Measures” below.
Non-GAAP Measures
References in this news release to “Adjusted EBITDA” are to earnings (including the equity in earnings of the Joint Ventures) before interest, taxes, depreciation and amortization (“EBITDA”), as further adjusted to exclude foreign currency exchange gains and losses on translation of long-term debt, unrealized gains on the changes in the value of derivative instruments, stock compensation, and gains and losses on asset sales, and adjusts for the difference in accounting treatment of Pure Sunfarms, which we believe is necessary to reflect the true economic value of our interest in Pure Sunfarms. Adjusted EBITDA is a cash flow measure that is not recognized under GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, Adjusted EBITDA may not be comparable to similar measures presented by other issuers. Although net income or loss is the most directly comparable financial measure calculated and presented in accordance with GAAP, investors are cautioned that Adjusted EBITDA should not be construed as an alternative to net income or loss determined in accordance with GAAP as an indicator of the Company’s performance or to cash flows from operating, investing and financing activities as measures of liquidity and cash flows. Management believes that Adjusted EBITDA is an important measure in evaluating the historical performance of the Company.
We also present Adjusted EBITDA, earnings per share and diluted earnings per share on a proportionate segment basis. Each of the components of Adjusted EBITDA, on a proportionate segment basis, are presented in the tables below that present a reconciliation of GAAP results to proportionate results. We believe that the ability of investors to assess our overall performance may be improved by the disclosure of proportionate segment Adjusted EBITDA, earnings per share and diluted earnings per share.
The following table reflects a reconciliation of net income to Adjusted EBITDA, as presented by the Company:
The following tables are a reconciliation of the GAAP results to the proportionate results (which include the Company’s proportionate share of the Pure Sunfarms operations):
Pro Forma Results
The combined pro forma financial information being presented is for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the transaction occurred as of January 1, 2020, nor do they purport to project the future operating results of the consolidated company. The pro forma financial information also does not reflect the costs of any integration activities or cost savings or synergies expected to be achieved as a result of the transaction and, accordingly, do not attempt to predict or suggest future results.
The combined pro forma financial information being presented is based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. Accordingly, this pro forma financial data is not necessarily indicative of our financial position or results of operations had the Pure Sunfarms acquisition described above for which we are giving pro forma effect actually occurred on the date indicated.
The following tables present pro forma GAAP results as if the Company’s owned 100% of the Pure Sunfarms operations as of January 1, 2020:
Within 75 days of November 2, 2020 (the closing date of the Pure Sunfarms acquisition), the Company will file with the U.S. Securities and Exchange Commission, on Form 8-K/A, historical financial statements for Pure Sunfarms, together with unaudited pro forma combined financial statements of the Company as if the Pure Sunfarms Transaction had occurred on January 1, 2020.
This press release is intended to be read in conjunction with the Company’s Consolidated Financial Statements (“Financial Statements”) and Management’s Discussion & Analysis (“MD&A”) for the three and nine month periods ended September 30, 2020 in the Company Form 10-Q, which will be filed on (www.sec.gov/edgar.shtml) and SEDAR (www.sedar.com) and will be available at www.villagefarms.com.
Conference Call
Village Farms’ management team will host a conference call, Friday, November 13, 2020, at 8:30 a.m. ET to discuss its financial results. Participants can access the conference call by telephone by dialing (647) 427-7450 or (888) 231-8191, or via the Internet at: https://bit.ly/2HoYneE.
For those unable to participate in the conference call at the scheduled time, it will be archived for replay both by telephone and via the Internet beginning approximately one hour following completion of the call. To access the archived conference call by telephone, dial (416) 849-0833 or (855) 859-2056 and enter the passcode 9199257 followed by the pound key. The telephone replay will be available until Friday, November 20, 2020 at midnight (ET). The conference call will also be archived on Village Farms’ website at http://villagefarms.com/investor-relations/investor-calls.
About Village Farms International, Inc.
Village Farms is one of the largest and longest-operating greenhouse growers in North America, and is leveraging its decades of experience in large-scale, low-cost intensive agriculture and as a vertically integrated produce supplier to pursue high-value, high-growth plant-based Consumer Packaged Goods opportunities in cannabis and CBD in North America and selected markets internationally.
In Canada, British-Columbia-based Pure Sunfarms is one of the single largest cannabis operations in the world, the lowest-cost greenhouse producer, one of the best-selling brands, and has generated profitability for seven consecutive quarters.
In the U.S., subject to compliance with all applicable U.S. federal and state laws, Village Farms is pursuing a strategy to become a leading developer and supplier of branded and white-labeled CBD products targeting “big box” and other major retailers and consumer packaged goods companies, and with one the largest greenhouse operations in country, is well positioned for the potential federal legalization of high-THC cannabis.
Internationally, Village Farms is strategically targeting selected, nascent, legal cannabis and CBD opportunities with significant long-term potential, with an initial focus on the Asia-Pacific region through its investment in Australia-based Altum International.
