10-Q: Village Farms International Reports Q2 2024 Results, Impacted by U.S. Cannabis Impairment

Village Farms International's Q2 2024 results show increased sales but a net loss due to a significant impairment in its U.S. cannabis segment.

Summary

• Village Farms International reported a net loss of $23.5 million for the three months ended June 30, 2024, compared to a loss of $1.38 million in the same period last year.
• The loss was primarily driven by a $11.9 million impairment of goodwill and intangible assets in the U.S. cannabis segment.
• Sales increased to $92.2 million, up from $77.2 million in Q2 2023, with growth in Canadian cannabis and produce segments.
• Gross profit decreased to $9.2 million from $11.5 million year-over-year, due to lower margins in the produce and U.S. cannabis segments.
• Selling, general, and administrative expenses increased to $19.7 million from $16.8 million in the same period last year.
• Adjusted EBITDA was a loss of $3.6 million, compared to a profit of $4.5 million in Q2 2023.
• The company increased its ownership in Rose LifeScience to 80% for approximately $3 million.
• The company's Canadian cannabis segment saw a 45% increase in sales, driven by both branded and non-branded sales.
• The U.S. cannabis segment experienced a 19% decrease in sales due to the proliferation of unregulated hemp-derived products.
• The produce segment saw a 7% increase in sales, but gross profit decreased due to lower average selling prices.

Sentiment

Score: 4

Explanation: The document presents mixed results with strong growth in Canadian cannabis but significant losses and challenges in the U.S. cannabis segment. The overall tone is cautious due to the impairment and lower profitability.

Positives

• The Canadian cannabis segment continues to show strong growth, with a 45% increase in sales.
• The company has expanded its market share in the Canadian cannabis market, becoming the second best-selling producer nationally.
• The company has successfully launched new products, such as Hi-Def Pre-Rolls, in the Canadian market.
• The company's Texas greenhouse operations have improved, resulting in a decrease in cost per pound.
• The Delta, British Columbia Renewable Natural Gas Project began operations in April 2024, contributing incremental profit.
• The company has extended its credit agreement with a Canadian chartered bank, providing additional financial flexibility.

Negatives

• The company reported a net loss of $23.5 million for Q2 2024, a significant increase from the $1.38 million loss in Q2 2023.
• The U.S. cannabis segment experienced a 19% decrease in sales due to the proliferation of unregulated hemp-derived products.
• The company recorded a $11.9 million impairment of goodwill and intangible assets in the U.S. cannabis segment.
• Gross profit decreased by 20% year-over-year, primarily due to lower margins in the produce and U.S. cannabis segments.
• Adjusted EBITDA was a loss of $3.6 million, compared to a profit of $4.5 million in Q2 2023.
• The produce segment experienced a decrease in gross profit due to lower average selling prices.

Risks

• The company faces risks related to the legal status of cannabis in the United States.
• The proliferation of unregulated hemp-derived products in the U.S. market poses a challenge to the CBD industry.
• The company is vulnerable to rising energy costs and inflationary effects on cultivation and transportation.
• The company faces potential recessionary effects on demand for its products.
• The company is subject to risks associated with cross-border trade and foreign exchange exposure.
• The company has a limited operating history in the cannabis and cannabinoids industry.
• The company is dependent on credit facilities and dilutive transactions for financing.

Future Outlook

The company expects international expansion to enhance profitability while expanding its brand into emerging legal cannabis markets. Production in the Netherlands is targeted to start in the fourth quarter of 2024.

Management Comments

• The company's vision is to be recognized as an international leader in consumer products developed from plants.
• The company leverages decades of cultivation expertise, investment, and experience in fresh produce into branded and wholesale cannabis products.
• The company's focus for its Canadian Cannabis segment is to produce high quality cannabis, leveraging low-cost production to provide preferred products at an attractive price.
• The company has a strategy to participate in other international markets where cannabis attains legal status.
• The company intends to use its assets, expertise and experience (across cannabis, CBD and produce) to participate in the U.S. Cannabis market subject to compliance with applicable U.S. federal and state laws and applicable stock exchange rules.

Industry Context

The company's performance is affected by broader industry trends, including the proliferation of unregulated hemp-derived products in the U.S. market and the ongoing evolution of the legal cannabis market in Canada and internationally.

Comparison to Industry Standards

• The company's Canadian cannabis segment is performing well, achieving the second-highest market share nationally, indicating a strong competitive position compared to other Canadian LPs.
• The U.S. cannabis segment's performance is below industry standards, as evidenced by the significant impairment and sales decline, reflecting challenges in the U.S. CBD market.
• The company's produce segment is facing challenges with lower average selling prices, which is a common issue in the agricultural industry.
• The company's adjusted EBITDA performance is below industry benchmarks, indicating a need for improved operational efficiency and cost management.
• The company's international expansion into the Netherlands is a strategic move to capitalize on emerging legal cannabis markets, similar to other companies seeking growth opportunities outside of North America.

Management Changes

Related Party Transactions

• The company leases its Rose office building from a company employee who also owns a minority interest in Rose.
• One of the company's employees is related to a member of the company's executive management team and received salary and benefits.
• The company entered into a Share Purchase Agreement with Rose and non-controlling shareholders, which includes two company employees, for the acquisition of an additional 10% interest in Rose.

Stakeholder Impact

• Shareholders are negatively impacted by the net loss and impairment charges.
• Employees may be affected by potential cost-cutting measures due to lower profitability.
• Customers may benefit from new product launches and improved quality in the Canadian cannabis segment.
• Suppliers may be affected by changes in the company's operations and supply chain.
• Creditors may be concerned about the company's financial performance and ability to repay debt.

Next Steps

• The company will continue the build-out of its first indoor cannabis production facility in the Netherlands, with production expected to begin in the fourth quarter of 2024.
• The company will continue to improve its Texas greenhouse operations and implement new cultivation technologies.
• The company will continue to evaluate other uses for its Monahans (Permian Basin, Texas) greenhouse facility.
• The company will continue to pursue its application for a Texas medicinal marijuana license.

Key Dates

Keywords

cannabis, CBD, produce, greenhouse, impairment, sales, EBITDA, financial results, market share, renewable natural gas