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Village Farms loses $5.07-million (U.S.) in Q3

2019-11-14 17:22 ET - News Release

Mr. Michael DeGiglio reports

VILLAGE FARMS INTERNATIONAL REPORTS THIRD QUARTER 2019 FINANCIAL RESULTS - CANADIAN CANNABIS JV, PURE SUNFARMS, ACHIEVES FOURTH CONSECUTIVE QUARTER OF POSITIVE EBITDA, ALL-IN COST OF PRODUCTION OF C$0.63 PER GRAM, GROSS MARGIN OF 69% AND EBITDA MARGIN OF 56%

Village Farms International Inc. has released its financial results for the third quarter and nine-month period ended Sept. 30, 2019. All figures are in U.S. dollars unless otherwise indicated.

Village Farms' financial and corporate highlights for the third quarter ended Sept. 30, 2019 (all comparable figures are for the third quarter ended Sept. 30, 2018):

  • Produce sales were $38.3-million (U.S.) compared with $39.7-million (U.S.);
  • Net loss before tax of $6.5-million (U.S.) and included the loss from Pure Sunfarms Corp. of $900,000 (U.S.) (Village Farms' share based on its 50-per-cent ownership). This compares with a net loss before tax of $2.7-million (U.S.);
  • Loss per share was 10 U.S. cents compared with loss per share of four U.S. cents;
  • EBITDA (earnings before interest, taxes, depreciation, amortization, foreign currency exchange gains and losses on translation of long-term debt, unrealized gains on the changes in the value of derivative instruments, unrealized change in biological asset, stock compensation, and gains and losses on asset sales) loss was $2.4-million (U.S.), including the positive contribution from Pure Sunfarms of $5.0-million (U.S.) ($6.6-million (Canadian)) (Village Farms' 50-per-cent share). This compares with an EBITDA loss of ($2.0-million (U.S.));
  • Subsequent to quarter-end, completed a bought deal offering of 3,059,000 common shares at a price of $9.40 (Canadian) per share for aggregate gross proceeds to the company of $28,754,600 (Canadian).

Third quarter financial results for Village Farms' Canadian cannabis joint venture, Pure Sunfarms (There were are no comparable results for the third quarter ended Sept. 30, 2018, as no production existed.):

  • Net sales (before Village Farms' 50-per-cent share), which consisted entirely of dried cannabis sold predominantly to other licensed producers, were $24.0-million (Canadian) ($18.1-million (U.S.)). Late in the third quarter, Pure Sunfarms began shipping branded packaged product to the Ontario Cannabis Store (OCS);
  • Sales for the third quarter did not include $7.2-million (Canadian) that was invoiced to Emerald Health Therapeutics (see the update on Pure Sunfarms' supply agreement with Emerald Health Therapeutics);
  • Cost of goods sold (all in cost) per gram was 63 Canadian cents (48 U.S. cents) per gram;
  • Gross margin was 69 per cent;
  • Selling, general and administrative expenses (before Village Farms' 50-per-cent share) of $3.7-million (Canadian) ($2.8-million (U.S.)) or 12 per cent of revenue;
  • Net loss (before Village Farms' 50-per-cent share) of $2.4-million (Canadian) ($1.8-million (U.S.)), which included the non-cash impact of a net charge of $12.6-million (Canadian) due to a change in value of the biological asset;
  • EBITDA (before Village Farms' 50-per-cent share) was $13.3-million (Canadian) ($10.1-million (U.S.)), marking Pure Sunfarms' fourth consecutive quarter of positive EBITDA and resulting in an EBITDA margin of 56 per cent.

Recent highlights for Village Farms' Canadian cannabis joint venture, Pure Sunfarms:

  • Pure Sunfarms was the top-performing brand of dried flower by both kilograms sold and dollar sales with the OCS in October, 2019, achieving 16-per-cent market share (by kilograms sold). Pure Sunfarms' dried flower products outsold the second ranked dried flower brand's products two to one (by kilograms sold). In addition:
    • Pure Sunfarms' Afghan Kush was the top-selling dried flower product with the OCS in October;
    • Three of the seven top-selling dried flower products with the OCS in October were Pure Sunfarms products;
  • Pure Sunfarms shipped its first order of branded dried cannabis products to the OCS in late September (followed by multiple reorders) following receipt from Health Canada on Sept. 6, 2019, of the amendment to its licence, permitting it to sell and distribute packaged, branded dried cannabis products directly to provincial/territorial wholesalers and authorized private retailers in Canada;
  • In British Columbia, Pure Sunfarms sold out its first order to the B.C. Liquor Distribution Branch (BCLDB) (which has since reordered) in under three weeks to rank among the top 10 brands by sales for all product categories in October. Pure Sunfarms began selling branded, packaged dried cannabis products to the BCLDB in October, following entry into a supply agreement in September;
  • Completed installation of extraction equipment (with processing capacity of 35,000 kilograms of biomass annually) in its new 65,000-square-foot state-of-the-art processing centre within the Delta 3 greenhouse facility in preparation for Cannabis 2.0. The processing centre has been designed for full GMP (good manufacturing practice) compliance and certification to allow for future exportation and is expected to be operational as soon as possible, subject to Health Canada licensing and in-house calibration and testing;
  • Achieved full run rate annual production of 75,000 kilograms of dried cannabis at its 1.1-million-square-foot Delta 3 greenhouse facility;
  • Commenced conversion of the interior of its second 1.1-million-square-foot greenhouse operation, the Delta 2 greenhouse facility, for cannabis production, which is conservatively expected to double Pure Sunfarms' annual output at full production to more than 150,000 kilograms. Conversion of the Delta 2 greenhouse facility, which has been designed for full GMP compliance and certification to all for future exportation, remains on schedule, with cannabis production expected to commence during the second quarter of 2020, and the facility is expected to be operating at full run rate production by the end of 2020. Pure Sunfarms has submitted to Health Canada its application for the initial cultivation licence for the Delta 2 greenhouse facility.

Recent highlights for Village Farms' U.S. hemp/cannabidiol (CBD) program

The company's joint ventures for outdoor hemp production and processing in the United States recently completed harvesting of approximately 625 acres of the approximately 870 acres of hemp planted in 2019, achieving an average yield of approximately 1,600 pounds per acre harvested, well in excess of its projections. The company expects to commence sales of hemp biomass as early as the fourth quarter of 2019.

"We are pleased to report another quarter in which Pure Sunfarms continued to set the standard for performance as a best-in-class cannabis operation, which again drove strong financial performance," said Michael DeGiglio, chief executive officer, Village Farms. "Pure Sunfarms achieved its fourth consecutive quarter of positive EBITDA, with an industry-leading all-in cost of production of 63 Canadian cents, gross margin of 69 per cent and EBITDA margin of 56 per cent. In the 12 months since adult-use cannabis was legalized in Canada in October, 2018, Pure Sunfarms has already generated $47-million (Canadian) in EBITDA, an especially impressive number given that its operations were ramping up throughout most of that period.

"Pure Sunfarms is now proving itself as a leading cannabis brand, ranking as the No.-1-selling dried flower brand by a wide margin with the Ontario Cannabis Store in October and having the overall top-selling dried flower product, as well as three of the seven top-selling dried flower product. We look forward to Pure Sunfarms building on this tremendous initial success as it launches its prerolled dried products, adds provincial supply agreements, starts its extraction operations on-line for the rollout of oils and other new product forms under Cannabis 2.0 in the first half of next year, and more than doubles its output, further supporting its low production costs.

"Pure Sunfarms continues to execute very well on what is under its control. Even as one of the largest Canadian adult-use cannabis suppliers by dollars sold, third quarter sales were constrained by the limited physical retail store infrastructure in Canada as well as the $7.2-million (Canadian) that could not be recognized. We built Pure Sunfarms, however, for profitability out of the gate, even in a commoditized environment, and it is one of the few and most profitable Canadian cannabis companies. With industry-leading cost production and a brand and products that are clearly resonating with consumers, Pure Sunfarms remains well positioned to continue to be a dominant supplier as the Canadian adult-use cannabis market continues to develop and expand.

"In our U.S. outdoor hemp program, we recently completed harvest of our 2019 crop, highlighted by yields that were well above our projections. We remain on track to begin generating profitable hemp sales as early as the fourth quarter of this year. Importantly, our first growing season has provided significant learnings that will be invaluable going forward. In our greenhouse hemp program, we continue to work with Texas Department of Agriculture on the implementation of its hemp regulatory framework subject to the recently published U.S. Department of Agriculture rules and are optimistic that licensing could commence in the first quarter of 2020. As we did in Canada with Pure Sunfarms, we are building a rock-solid foundation of exceptional growing operations from which to aggressively pursue our objective to launch our own white-labelled and branded CBD products in 2020.

"In our produce business, we continue to make steady progress in the transition of the production displaced for cannabis and hemp production to third party growing partners, recently adding approximately 120 acres with partners in Mexico and Canada to bring the total to nearly 300 acres. During this period of transition, we will continue to experience some impact on our financial results, more so in some quarters than others, which in the third quarter contributed to a net loss for the produce business of $5.1-million (U.S.)."

Update on Pure Sunfarms' supply agreement with Emerald Health Therapeutics

Pursuant to the terms of a supply agreement that Pure Sunfarms has with Emerald Health, Emerald has an obligation to purchase 40 per cent of Pure Sunfarms' cannabis production at a fixed price, subject to the terms and conditions of the supply agreement. To the extent that Emerald does not fulfill its purchase obligation, Pure Sunfarms is able to sell that excess production to other parties in the open market. The supply agreement stipulates that Emerald is required to pay Pure Sunfarms the difference between the fixed price and the selling price realized from other parties. During the quarter ended Sept. 30, 2019, Emerald did not fulfill its purchase obligation and Pure Sunfarms sold the product on the open market to arm's-length parties at prices lower than the fixed price in the supply agreement. As a result, under the terms of the supply agreement, Pure Sunfarms billed Emerald for the difference, which amounted to approximately $7.2-million (Canadian). On Oct. 15, 2019, Emerald issued a news release that indicated it does not agree that it has any liability with respect to these amounts.

Under IFRS 15 (international financial reporting standards), Revenue, from contracts with customers (paragraph 9 (e)), a customer needs to have an intent and ability to pay in order for a company to recognize revenue. Given that Emerald has issued a news release indicating that its does not agree that it has a liability with respect to these amounts, Pure Sunfarms has determined that all of the criteria under IFRS 15 to recognize this revenue were not met as Emerald has demonstrated that it does not have an intent to pay and as a result has not recorded the revenue related to these amounts.

The company understands that Emerald is in the process of investigating its liability to Pure Sunfarms. If Emerald does not agree to the liability, Pure Sunfarms has reserved the right to take such actions as it considers necessary and appropriate to recover its losses from Emerald for non-payment of amounts owing under the supply agreement. If Emerald were to agree to the liability in the future, such liability would be recognized in the revenue and profits of Pure Sunfarms, at such time in accordance with generally accepted accounting principles.

                                     SUMMARY STATUTORY RESULTS
                    (in thousands of U.S. dollars, except per-share amounts)

                                              Three months ended Sept. 30,  Nine months ended Sept. 30,
                                                        2019         2018            2019         2018

Produce sales                                       $ 38,293     $ 39,684         $111,512    $111,213
Cost of sales                                        (38,866)     (36,862)        (114,711)   (103,915)
Selling, general and administrative expenses          (3,739)      (3,442)         (11,682)    (10,486)
Stock compensation expense                              (868)        (190)          (3,190)       (447)
Change in biological asset                              (627)      (1,189)             (97)       (992)
Loss from operations                                  (5,807)      (1,999)         (18,168)     (4,627)
Interest expense, net                                   (393)        (618)          (1,503)     (1,906)
Foreign exchange gain (loss)                            (183)         (73)             338         (87)
Other income, net                                         69           17              219          61
Share of income (loss) from joint ventures              (171)         (28)          17,939        (369)
Gain on disposal of assets                                (8)           -           13,558           -
(Provision for) recovery of income taxes               1,421          712               81       1,513
Net income (loss)                                     (5,072)      (1,989)          12,464      (5,415)
Consolidated EBITDA                                    2,383          897            8,256       1,394
Earnings (loss) per share -- basic                  $  (0.10)    $  (0.04)        $   0.26    $  (0.12)
Earnings (loss) per share -- diluted                $  (0.10)    $  (0.04)        $   0.25    $  (0.12)

              SUMMARY RESULTS, INCLUDING JOINT VENTURES, ON A PROPORTIONATE BASIS
                    (in thousands of U.S. dollars, except per-share amounts)

                                              Three months ended Sept. 30,  Nine months ended Sept. 30,
                                                        2019         2018            2019         2018

Consolidated sales                                  $ 47,335     $ 39,779        $138,076     $111,308
Cost of sales                                        (41,711)     (36,934)       (121,443)    (103,987)
Selling, general and administrative expenses          (5,376)      (3,756)        (14,860)     (11,302)
Change in biological asset                            (4,057)        (921)          6,873         (564)
Gain on disposal of assets                                (8)           -          13,558            -
Net income (loss)                                     (5,072)      (1,989)         12,464       (5,415)
EBITDA                                                 2,377          897           8,256        1,394
Earning (loss) per share -- basic                   $  (0.10)       (0.04)       $   0.26     $  (0.12)
Earning (loss) per share -- diluted                 $  (0.10)       (0.04)       $   0.25     $  (0.12)

Financial highlights

Cannabis

For the three months ended Sept. 30, 2019. There are no comparable results for the three months ended Sept. 30, 2018, as no production existed.

The company's 50-per-cent share of net sales of Pure Sunfarms for the three months ended Sept. 30, 2019, was $9,042. Total Pure Sunfarms sales consisted of close to approximately 12,000 kilograms of flower and trim sold at an average selling price of over $1.50 per gram ($2 (Canadian) per gram) during the three months ended Sept. 30, 2019. Sales for the three months ended Sept. 30, 2019, were predominantly to other licensed producers and do not include $5.4-million (U.S.) ($7.2-million (Canadian)) invoiced to Emerald that was not able to be recognized as per the discussion above.

The company's 50-per-cent share of cost of sales of Pure Sunfarms for the three months ended Sept. 30, 2019, was $2,845.

The company's 50-per-cent share of selling, general and administrative expenses of Pure Sunfarms for the three months ended Sept. 30, 2019, was $1,415.

The company's 50-per-cent share of net loss for the three months ended Sept. 30, 2019, was $918 compared with $28 for the three months ended Sept. 30, 2018. The net loss for the three months ended Sept. 30, 2019, is due to a change in the biological asset of negative $4.8-million.

The company's 50-per-cent share of EBITDA for the three months ended Sept. 30, 2019, was $5,033 compared with negative $12 for the three months ended Sept. 30, 2018.

For the nine months ended Sept. 30, 2019. There are no comparable results for the nine months ended Sept. 30, 2018, as no production existed.

The company's 50-per-cent share of net sales of Pure Sunfarms for the nine months ended Sept. 30, 2019, was $26,564. Total Pure Sunfarms sales consisted of close to 24,600 kilograms of flower and trim during the nine months ended Sept. 30, 2019, at an average sales price of approximately $2.15 per gram ($2.85 (Canadian) per gram).

The company's 50-per-cent share of cost of sales of Pure Sunfarms for the nine months ended Sept. 30, 2019, was $6,732 (based on total grams sold of close to 24,600 kilograms) or approximately 55 cents per gram (73 Canadian cents per gram).

The company's 50-per-cent share of selling, general and administrative expenses of Pure Sunfarms for the nine months ended Sept. 30, 2019, was $2,808 and primarily consisted of personnel costs and Health Canada fees.

Income from operations for the company's 50-per-cent share of Pure Sunfarms was $22,658 for the nine months ended Sept. 30, 2019.

The company's 50-per-cent share of net income for the nine months ended Sept. 30, 2019, was $17,342 versus a loss of $369 for the nine months ended Sept. 30, 2018.

The company's 50-per-cent share of EBITDA for the nine months ended Sept. 30, 2019, was $17,704 versus negative $363 for the same period in 2018.

Produce

For the three months ended Sept. 30, 2019, compared with the three months ended Sept. 30, 2018

Sales for the three months ended Sept. 30, 2019, decreased by $1,391, or 4 per cent, to $38,293 from $39,684 for the three months ended Sept. 30, 2018. The decrease in sales is primarily due to a decrease in the company's product volume as well as a decrease in supply partner revenue.

Cost of sales for the three months ended Sept. 30, 2019, increased by $2,004, or 5 per cent, to $38,866 from $36,862 for the three months ended Sept. 30, 2018, primarily due to an increase in cost per pound from the Texas facilities, due to production issues that caused decreases in production. The decrease in production for the crop causes an increase in cost per pound as most costs are fixed and, as production decreases, cost per pound increases.

For the nine months ended Sept. 30, 2019, compared with the nine months ended Sept. 30, 2018

Sales for the nine months ended Sept. 30, 2019, increased $299, or less than 1 per cent, to $111,512 compared with $111,213 for the nine months ended Sept. 30, 2018. The increase in net sales is due to an increase in supply partner revenues of 12 per cent over the comparable period in 2018, partially offset by a 14-per-cent decrease in the company's production volume. The decrease in the company's production volume is primarily due to a cleanout in one of company's facilities (which did not occur in the last three years) and continuing virus pressure at the company's Texas facilities.

Cost of sales for the nine months ended Sept. 30, 2019, increased $10,796, or 10 per cent, to $114,711 from $103,915 for the nine months ended Sept. 30, 2018, due to an increase in supply partner purchases of 12 per cent and an increase in the cost per pound of the company's own grown product in Texas due to decreased pounds and higher labour costs, due to the higher utilization of hourly rate contract labourers versus Village Farms' employees for the 2018/2019 crop as compared with the prior crop.

Consolidated EBITDA

EBITDA for the three months ended Sept. 30, 2019, increased by $4,339 to $5,236 from $897 for the three months ended Sept. 30, 2018. The increase is primarily as a result of an increase in the company's share of EBITDA from Pure Sunfarms of $7,886, partially offset by an increase in the loss from operations for the company's produce business.

EBITDA for the nine months ended Sept. 30, 2019, increased $9,713 to $11,109 from $1,394 for the nine months ended Sept. 30, 2018, primarily as a result of an increase in the company's share of income from Pure Sunfarms (Pure Sunfarms EBITDA -- $20,558), partially offset by an increase in the loss from the company's produce business.

Conference call

Village Farms' management team will host a conference call Friday, Nov. 15, 2019, at 8:30 a.m. ET to discuss its third quarter 2019 financial results. Participants can access the conference call by telephone by dialling 647-427-7450 or 888-231-8191, or via the Internet.

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 4987345 followed by the pound key. The telephone replay will be available until Friday, Nov. 22, 2019, at 12 a.m. ET. The conference call will also be archived on Village Farms' website.

About Village Farms International Inc.

Village Farms is one of the largest and longest-operating vertically integrated greenhouse growers in North America and the only publicly traded greenhouse produce company in Canada. Village Farms produces and distributes fresh, premium-quality produce with consistency 365 days a year to national grocers in the United States and Canada from more than nine million square feet of controlled environment agriculture (CEA) greenhouses in British Columbia and Texas, as well as from its partner greenhouses in British Columbia, Ontario and Mexico. The company is now leveraging its 30 years of experience as a vertically integrated grower for the rapidly emerging global cannabis opportunity through its 50-per-cent ownership of British Columbia-based Pure Sunfarms. The company also intends to pursue opportunities to become a

          CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE (LOSS)
                       (in thousands of U.S. dollars, except per-share amounts)                        

                                              Three months ended Sept. 30,  Nine months ended Sept. 30,
                                                        2019         2018            2019         2018

Sales                                             $   38,293   $   39,684      $  111,512   $  111,213
Cost of sales                                        (38,866)     (36,862)       (114,711)    (103,915)
Change in biological asset                              (627)      (1,189)            (97)        (992)
Selling, general and administrative expenses          (4,607)      (3,632)        (14,872)     (10,933)
(Loss) from operations                                (5,807)      (1,999)        (18,168)      (4,627)
Interest expense                                        (697)        (709)         (2,154)      (2,017)
Interest income                                          304           91             651          111
Foreign exchange (loss) gain                            (183)         (73)            338          (87)
Other income, net                                         69           17             219           61
Share of income (loss) from joint ventures              (171)         (28)         17,939         (369)
(Loss) gain on disposal of assets                         (8)           -          13,558            -
Income (loss) before income taxes                     (6,493)      (2,701)         12,383       (6,928)
Recovery of income taxes                                1,421         712              81        1,513
Net income (loss)                                 $   (5,072)  $   (1,989)     $   12,464   $   (5,415)
Basic income (loss) per share                     $    (0.10)  $    (0.04)     $     0.26   $    (0.12)
Diluted income (loss) per share                   $    (0.10)  $    (0.04)     $     0.25   $    (0.12)
Other comprehensive income (loss)                                                                            
Foreign currency translation adjustment                  (22)          40              58          (48)
Comprehensive income (loss)                       $   (5,094)  $   (1,949)     $   12,522   $   (5,463)

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