‘Earning’s Month(s)’ have begun in earnest, and Village Farm’s ($VFF) is one of the first. Our last structure (Q3F2021) on $VFF went into some depth around their ‘transformation’ (perhaps better described as ‘diversification’) and a notable cash burn.

Their share price has shown some resilience as compared to say, a Green Thumb ($GTII) or a Curaleaf ($CURA) in recent days. The MSO sector remains volatile, and the main ETF (Advisor Shares) is staring at 2 year lows, despite an increase in volume.

No time like the present.

To the financials!

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• Cash down QoQ $27.5MM, now at just over $53MM. While receivables remain flat ($34MM), inventory has grown 20% during the period, clocking in at almost $69MM.
• All values following relate only to the cannabis side of their business. During 2021, the veggie business did $159MM in revenue, and reported losses of some $8MM. Just like it’s been doing for years. There was a seasonal bump of 11% in sales this quarter, which helped the annual totals (and margin) out considerably.
• Canadian sales slightly down QoQ ($26.8MM v $27.3MM). It’s more pronounced when noting the total sales includes $1.4MM of Rose LifeScience revenue. Strictly speaking, organic Canadian cannabis sales came off $2MM QoQ.
• This is attributed to a 33% drop in wholesale product revenues (which would help explain that inventory bump). $VFF notes their branded product sales are up 7% though.
• Canadian cannabis SG&A went up $2MM QoQ though on marketing expenses (for the branded products) and higher wages/costs. The vapes coming on-stream, as ‘derivative’ products now comprise 11% of total sales (up 5% QoQ).
• Canadian segment gross margin dropped from 48% to 45% QoQ. More below.
• The US side revenues (hemp) grew by $3.6MM QoQ, almost doubling to $7.5MM during the quarter. This looks like quite the business, as it’s primarily direct to consumer (DTC) e-commerce (70% of sales) and retail (15%), and the business segment is sporting a 70% gross margin. Woot. A real bright spot there.
• SG&A in that segment is steep though, as technology and marketing ain’t cheap. It clocked in at 50% of sales. The segment reported a positive net income of $2MM on $11MM in sales YTD (implying a $5MM/yr positive net income run rate at these sales levels.
• Definitely a dial to watch as it’s promising. Growth in this business line though has been really challenging across sector (see Lord Jones ($CRON) & Charlotte’s Web ($CWEB) for clear examples).
• SBC has levelled off to some $1.8MM per quarter.
• $VFF reported a $220k loss on disposal on assets, some part of it was related to a folly in The Netherlands called ‘DutchCanGrow’. It’s hard to find out what they put into it. It appears to be a company that applied for 1 of 10 cannabis grow licences in the country – ostensibly a test pilot for broader cultivation. The licenses were handed out via lottery, of which DutchCanGrow didn’t ‘win’. Utterly immaterial, but if one knows anything about The Netherlands and drug policy, the whole move was really dumb in my opinion.

Ok. Not much has changed in their capital structure. And, these financials are improving modestly. Yet, Their annual is filed under an 8-K format (not a 10-Q, which is what their quarterlies are filed in). Presumably a 10-K is forthcoming, but it’s an irritation due to differences in presentation (ie: no ‘Notes’ are included in an 8-K either).

From the 8-K:

Here’s what $VFF had to say about gross margin in the Canadian segment:

I’ve put these in here to illustrate a couple of things. One, there’s a core assumption by $VFF: that they can sell their product at will. And two, that a shift in product mix will help gross margin. These assumptions have underpinned $VFF’s business approach (and pretty much any company in any sector that’s ever existed). Not notable unto itself, but this is the Canadian cannabis sector after all.

If I was able to get a question into management on the call (I wasn’t) – I’d ask how much seasonal impacts are related to their sales decline. I’d also ask if they see any of the sales drop driven by cannibalization across new product platforms.

I’d also think that wholesale margins would be less than vertically produced (in general), so I’m a little puzzled that $VFF would attribute a drop in margin to a significant drop in wholesale levels. I mean, that implies their cost of transformation (packaging/processing et al) is high.

Still, a 45% margin in this space is good. $VFF can grow product cheaply, and apparently well since they hold a dominant position in the Canadian market.

Still, the veggie side is a millstone, and cannabis sales are levelling out to ~=48% of total revenue. That hemp acquisition they did looks promising. I’d think an investor needs to keep a close eye on how the sales/SG&A of that unit are doing.

That same investor would do well to keep an eye on inventory levels in Canada. ‘Opportunistic’ wholesale transactions didn’t occur during Q4. That might mean price. It might also mean demand for wholesale simply wasn’t there – which would be a negative sign. As $VFF ramps Phase 3, they’ve more production ability coming online – while sales were down QoQ.

This company has had my eye for years now (via the PSF/Emerald saga or just a veggie balance sheet landing hard in dope). They’ve moved forward – positively on several fronts. Profitability remains largely elusive, albeit present. Which, is in stark contrast to so much of the Canadian sector.

This remains one of the more positive stories in Canadian cannabis, all while it continues to be a ‘wait and see’.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $VFF.