VILLAGE FARMS INTERNATIONAL, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated interim financial statements and related notes included in Item 1 of Part I of this Quarterly Report and the Management's Discussion and Analysis of Financial Condition and Results of Operations and consolidated financial statements contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . This discussion and analysis contain forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on assumptions and estimates that are inherently subject to significant risks and uncertainties, and our actual results could differ materially from the results anticipated by our forward-looking statements, particularly in light of the ongoing COVID-19 pandemic. We encourage you to review the risks and uncertainties described in "Risk Factors" in Part I, Item 1A in the Annual Report on Form 10-K for the year endedDecember 31, 2021 , and in Part II, Item 1A in the Quarterly Report on Form 10-Q endedMarch 31, 2022 and in Part II, Item 1A of this Quarterly Report. These risks and uncertainties could cause actual results to differ materially from those projected or implied by our forward-looking statements contained in this report. These forward-looking statements are made as of the date of this management's discussion and analysis, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by law. EXECUTIVE OVERVIEWVillage Farms International, Inc. ("VFF", together with its subsidiaries, the "Company", "Village Farms ", "we" "us" or "our") is a corporation existing under the Business Corporations Act (Ontario ). The Company's principal operating subsidiaries areVillage Farms Canada LP ,Village Farms LP ,Pure Sunfarms Corp ("Pure Sunfarms"),Balanced Health Botanicals, LLC ("Balanced Health "),Rose LifeScience Inc. ("Rose LifeScience" or "Rose") andVF Clean Energy, Inc. ("VFCE").Village Farms acquired 70% ownership of privately-held,Quebec -based Rose LifeScience onNovember 15, 2021 and acquired a 100% interest in privately heldColorado -basedBalanced Health onAugust 16, 2021 . The Company's overall strategy is to be recognized as an international leader in consumer products from plants, whereby we produce and market value-added products that are consistently preferred by consumers. To do so, we leverage decades of cultivation expertise, investment, and experience in fresh produce (primarily tomatoes) across other plant-based opportunities. InCanada , we converted two produce facilities to grow cannabis for the Canadian adult use market. Our focus for our Canadian Cannabis segment is to produce the highest quality cannabis, leveraging our low-cost production to provide products that address the largest consumer segments in the market. This market position, together with our cultivation expertise, has enabled us to evolve into one of the few consistently profitable Canadian licensed producers ("LPs"). Additionally, through organic growth, acquisitions and/or exports, we plan to participate in other international markets where cannabis attains legal status. InMarch 2022 , Pure Sunfarms received European Union Good Manufacturing Practice ("EU GMP") certification for its 1.1 million square footDelta 3 cannabis facility located inDelta, British Columbia ("B.C .") which permits Pure Sunfarms to export EU GMP-certified medical cannabis to importers and distributors in international markets that require EU GMP certification. We expect international expansion should enhance our profitability while expanding our brand and experience into emerging new legal cannabis markets. Within theU.S. , we acquiredBalanced Health , an industry-leading cannabinoid business which extends our portfolio into cannabidiol ("CBD") consumer products. We also operate a large, well-established produce business under the Village Farms Fresh ("VF Fresh") brand which sells into food and mass retail stores. We own and operate produce cultivation assets inTexas andDelta, B.C. and source produce from our growing partners, predominantly inMexico . Our intention is to use our assets, expertise and experience (across cannabis, CBD and produce) to participate in theU.S. cannabis market when legally permitted to do so.
Our Operating Segments
Canadian Cannabis Segment
Pure Sunfarms is one of the single largest cannabis growing operations in the world, one of the lowest-cost greenhouse producers and one of the best-selling flower brands inCanada . Pure Sunfarms leverages our 30 years of experience as a vertically integrated greenhouse grower for the high growth cannabis opportunity inCanada with commercial distribution in ten Canadian provinces and territories that represent 98% of total Canadian legal recreational cannabis sales. Our long-term objective for Pure Sunfarms is to be the leading low-cost, high-quality cannabis producer inCanada .Village Farms acquired 70% ownership of privately-held Rose LifeScience onNovember 15, 2021 . Rose is a leading LP of cannabis in the Province ofQuebec as well as a prominent third-party cannabis products commercialization expert inQuebec , acting as the exclusive, direct-to-retail sales, marketing and distribution entity for some of the best-known brands inCanada as well asQuebec -based micro and craft growers. 15 --------------------------------------------------------------------------------
On
The Company entered theU.S. hemp business in the spring of 2019 after the passing of the 2018 Farm Bill. We established a joint venture with a 65% interest in VF Hemp for multi-state outdoor hemp cultivation and cannabidiol extraction. During the second quarter of 2022, VF Hemp wrote off the remaining hemp inventory and subsequently, the Company wrote off the remaining balance of its loan to VF Hemp. Currently, VF Hemp is not cultivating hemp as we awaitU.S. Food and Drug Administration ("FDA") clarity on the use of CBD.
VF Fresh (Produce)
Through our Village Farms Fresh brand, we are growers, marketers and distributors of premium-quality, greenhouse-grown tomatoes and cucumbers inNorth America . These premium products are grown in sophisticated, highly intensive agricultural greenhouse facilities located in B.C. andTexas . The Company also markets and distributes premium tomatoes, peppers and cucumbers produced under exclusive arrangements with other greenhouse producers located primarily inMexico , B.C. andOntario . The Company primarily markets and distributes under its Village Farms® brand name to retail supermarkets and dedicated fresh food distribution companies throughoutthe United States andCanada . Clean Energy Segment Through our subsidiaryVF Clean Energy, Inc. , we owned and operated a power plant from landfill gas that generated electricity and provided thermal heat, in colder months, to one of the Company's adjacentDelta, B.C. greenhouse facilities and sold electricity to theBritish Columbia Hydro and Power Authority . As ofApril 30, 2022 , VFCE has shut down its power plant in preparation for the transition to aRenewable Natural Gas ("RNG") operation in conjunction withMas Energy, LLC ("theDelta RNG Project ), which we believe will enhance our financial return, as well as provide food-grade CO2 that can be used in both our cannabis and produce growing operations inDelta, B.C. The Delta RNG Project consists of a partnership with Mas Energy to convert the current landfill gas to electricity business into a state-of-the-art landfill gas to high-demand renewable natural gas facility, which was entered into inNovember 2020 by VFCE. Mas Energy designed theDelta RNG Project and is in process of building the facility. VFCE renewed and extended the existing contract with theCity of Vancouver to capture the landfill gas at itsDelta, B.C. site securing future resources for theDelta RNG Project . The 20-year extension, with an option for an additional five-year extension period, commences upon the start-up of the commercial operations of theDelta RNG Project . Mas Energy intends to sell the renewable natural gas and VFCE will receive a portion of the revenues in the form of a royalty. For additional detail, see "Recent Developments and Updates -Delta RNG Project " below.
Impact of Inflation and the
Our business has been affected, and we expect will continue to be affected for the foreseeable future, by rising inflation and supply chain issues arising from COVID-19, and indirectly, theRussia /Ukraine conflict which may negatively affect our operating results. Inflation has affected and continues to affect, amongst other items, supply chain and labor costs as well as purchasing decisions of consumers which may impact demand for our products. See Part II, Item 1A, "Risk Factors", in the Quarterly Report endedMarch 31, 2022 .
Our Response to the Ongoing Coronavirus Pandemic
InMarch 2020 , theWorld Health Organization declared the outbreak of the COVID-19 virus a global pandemic. This outbreak continues to cause disruptions to businesses and markets worldwide as the virus continues to spread. In response to the COVID-19 pandemic, the Company implemented safety protocols and procedures to protect its employees, its subcontractors, and its customers. These protocols take into consideration guidance from state and local government agencies as well as theCenters for Disease Control and Prevention and other public health authorities. As ofNovember 9, 2022 , all of the Company's operations are operating normally, however, the extent to which COVID-19 affects the Company's business, results of operations and financial condition, will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any recovery period, future actions taken by governmental authorities, central banks and other third parties (including new financial regulation and other regulatory reform) in 16 -------------------------------------------------------------------------------- response to the pandemic, and the effects on our produce, clients, vendors and employees.Village Farms continues to service its customers amid uncertainty and disruption linked to COVID-19 and is actively managing its business to respond to the impact.
Recent Developments and Updates
OnJuly 7, 2022 ,Netherlands -basedLeli Holland B.V. ("Leli") was awarded the tenth and final cultivation license for the Closed Cannabis Supply Chain Experiment ("Dutch Supply Chain Experiment"). OnJuly 19, 2022 ,Village Farms acquired 85% of Leli under its previously announced purchase option agreement for$4,568 (EUR4,250 ), which was paid for as described below. As a result of the option exercise,Village Farms now owns one of the ten licenses in the Dutch Supply Chain Experiment. Since the Company exercised the option, the Company will be the majority owner of Leli and as such,Village Farms is responsible for the development of the project and product commercialization throughout the fully vertically integrated business model. OnSeptember 28, 2021 ,Village Farms paid$58 (EUR50 ) to enter into an option agreement whereby the Company received the irrevocable right to acquire an interest in Leli. OnMarch 18, 2022 , the Company loaned$2,715 (EUR2,575 ) to L.L. Lichtendahl Beheer B.V so thatL.L. Lichtendahl Beheer B.V. could purchase 100% of Leli. OnJuly 19, 2022 , the loan converted to a payment from the Company toL.L. Lichtendahl Beheer B.V. In addition, onJuly 19, 2022 , a payment in the amount of$1,795 (EUR1,625 ) was released from escrow and paid toL.L. Lichtendahl Beheer B.V. as part of the compensation for 85% ownership of Leli. Leli is one of ten applicants selected to receive a license to legally cultivate and distribute cannabis to retailers when the Dutch government implements its Dutch Supply Chain Experiment. The Dutch Supply Chain Experiment is currently in its preparatory phase of the program which began inJuly 2020 . The Dutch Supply Chain Experiment is specified by the Dutch government to be approximately 65,000 kilograms of dried flower annually from the ten approved producers during the first year. Leli plans to construct two indoor CEA production facilities, leveraging Leli's track record managing complex regulatory and approval procedures inthe Netherlands at both the federal and local levels andVillage Farms' three-plus decades as a vertically integrated CEA grower, as well as its extensive experience in cultivation, product development and commercialization in the Canadian legal recreational cannabis market. The actual experiment is anticipated to begin by 2024, however, the Dutch Supply Chain Experiment continues to experience delays as the program moves from the preparatory phase to the transitioning phase whereby participating coffeeshops will begin selling both regulated and tolerated cannabis.
Canadian Cannabis Recent Developments and Updates
Canadian Cannabis recent developments and updates include the following:
•
Canadian Cannabis launchedThe Original Fraser Valley Weed Co. inBritish Columbia andAlberta provinces and extended the Pure Sunfarms brand into the provinces and territories ofYukon ,Northwest Territories ,New Brunswick ,Newfoundland andLabrador while Rose LifeScience launched certain brands in the provinces and territories ofYukon ,Northwest Territories andNew Brunswick .
•
Canadian Cannabis market share grew steadily during the quarter and continued in October, marking four straight months of gains. Third party sources (amalgamated to cover all provinces) indicate thatVillage Farms entities ranked as the # 3 licensed producer inCanada and the Pure Sunfarms brand remained the #1 flower brand, with market share growing in all provinces.
•
Pure Sunfarms placed number 17 of 430 companies, and was ranked as the fastest growing cannabis company, by The Globe & Mail Report on Business' 2022 ranking ofCanada's Top Growing Companies.
•
Delta RNG Project Update
When announced inNovember 2020 , we had originally anticipated attaining all regulatory approvals in the first half of 2021 with an expected operational start up as early as the first half of 2022. However, COVID-19 adversely impacted the bureaucratic approval processes inCanada surrounding permitting and zoning requirements necessary to break ground on theDelta RNG Project . As a result. we did not attain all of the regulatory approvals for theDelta RNG Project until the first half of 2022. Accordingly, Mas Energy has begun construction during the latter part of the second quarter of 2022 and we currently expect an operational start up in mid-2023. 17 --------------------------------------------------------------------------------
OBCA Continuance
OnNovember 9, 2022 , we completed the continuance of the Company from theCanada Business Corporations Act ("CBCA") into the Province ofOntario under the Business Corporations Act (Ontario ) ("OBCA"). For a comparison of the material differences between the OBCA and CBCA, see "Item No. 5-Continuance of the Company under the Business Corporations Act (Ontario )" in our Definitive Proxy Statement on Schedule 14A for our 2022 Annual and Special Meeting of Shareholders. We have filed copies of our OBCA articles and bylaws as exhibits to this Quarterly Report on Form 10-Q.
Presentation of Financial Results
Our consolidated results of operations (prior to net income) for the three and nine months endedSeptember 30, 2022 andSeptember 30, 2021 presented below reflect the operations of our consolidated wholly-owned subsidiaries, which does not include our VFH joint venture. The income (loss) from our equity method investment is reflected in our net income for the three and nine months endedSeptember 30, 2022 and 2021 presented below.Village Farms acquired 100% ofBalanced Health onAugust 16, 2021 and their operating results are consolidated in our Consolidated Statements of Loss for the three and nine months endedSeptember 30, 2022 as well as forAugust 16, 2021 throughSeptember 30, 2021 for the three and nine months endedSeptember 30, 2021 . The Company acquired 70% of Rose LifeScience onNovember 15, 2021 and their results are presented in the operations of our consolidated wholly-owned subsidiaries and the minority interest is presented in Net Income (Loss) Attributable to Non-controlling Interests, Net of Tax for the three and nine months endedSeptember 30, 2022 . RESULTS OF OPERATIONS (In thousands ofU.S. dollars, except per share amounts, and unless otherwise noted)
Consolidated Financial Performance
Three Months Ended September 30, Nine Months Ended September 30,
2022 (1) 2021 (1) 2022 (1) 2021 (1)
Sales $ 71,056 $ 72,442 $ 224,115 $ 195,212
Cost of sales (62,682 ) (54,693 ) (199,514 ) (169,891 )
Gross margin 8,374 17,749 24,601 25,321
Selling, general and administrative
expenses (16,868 ) (13,132 ) (51,241 ) (30,249 )
Share-based compensation (926 ) (1,820 ) (3,004 ) (5,705 )
Interest expense (982 ) (620 ) (2,330 ) (1,959 )
Interest income 60 50 129 99
Foreign exchange loss (1,963 ) (324 ) (2,171 ) (635 )
Other expense, net (17 ) (119 ) (14 ) (354 )
Impairments (2) - - (29,799 ) -
Write-off of joint venture loan - - (592 ) -
Gain (loss) on disposal of assets 7 - 7 (40 )
Recovery of (provision for) income
taxes 3,183 (1,077 ) 14,563 2,543
(Loss) income from consolidated
entities (9,132 ) 707 (49,851 ) (10,979 )
Less: net loss attributable to
non-controlling interests, net of tax 387 - 701 -
Income (loss) from equity method
investments - 38 (2,667 ) (175 )
Net (loss) income attributable to
Village Farms International Inc. $ (8,745 ) $ 745 $ (51,817 ) $ (11,154 )
Adjusted EBITDA (3) $ (2,233 ) $ 6,933 $ (18,358 ) $ 9,183
Basic (loss) income per share $ (0.10 ) $ 0.01 $ (0.59 ) $ (0.14 ) Diluted (loss) income per share
$ (0.10 ) $ 0.01 $ (0.59 ) $ (0.14 )
(1)
For the three and nine months ended September 30, 2022 , Balanced Health's
financial results are fully consolidated in the financial results of the Company
and Village Farms' share of Rose LifeScience's financial results are fully
consolidated in the financial results of the Company with the minority
non-controlling interest presented in net loss attributable to non-controlling
interests, net of tax. For the three and nine months ended September 30, 2021 ,
Balanced Health's post-acquisition financial results for August 16, 2021 through
September 30, 2021 are fully consolidated in the financial results of the
Company.
(2)
Consists of impairments to goodwill of ($25,169 ) and intangible assets of
($4,630 ) that were triggered by inflationary effects on consumer spending,
decreases in market capitalization of CBD companies and the continued lack of
clarity with respect to federal regulation of CBD. See Part 1, Item 1 Note 6
"Goodwill and Intangible Assets" for additional details.
(3)
Adjusted EBITDA is not a recognized earnings measure and does not have a
standardized meaning prescribed by GAAP. Therefore, Adjusted EBITDA may not be
comparable to similar measures presented by other issuers. Management believes
that Adjusted EBITDA is a useful supplemental measure in evaluating the
performance of the Company because it excludes non-recuring and other items that
do not reflect our business performance. Adjusted EBITDA includes the Company's
70% interest in Rose LifeScience since acquisition and 65% interest in VFH.
18
--------------------------------------------------------------------------------
We caution that our results of operations for the three and nine months ended
September 30, 2022 and 2021 may not be indicative of our future performance,
particularly in light of the ongoing COVID-19 pandemic. We are currently unable
to assess the ultimate impact of the COVID-19 pandemic on our business and our
results of operations for future periods.
Discussion of Financial Results
A discussion of our consolidated results for the three and nine months endedSeptember 30, 2022 andSeptember 30, 2021 is included below. The consolidated results include all four of our operating segments, VF Fresh (Produce), Canadian Cannabis,U.S. Cannabis and Clean Energy, along with all public company expenses.Village Farms acquired 100% ofBalanced Health onAugust 16, 2021 and their operating results are consolidated in our Consolidated Statements of Loss for the three and nine months endedSeptember 30, 2022 as well as forAugust 16, 2021 throughSeptember 30, 2021 for the three and nine months endedSeptember 30, 2021 . The Company acquired 70% of Rose LifeScience onNovember 15, 2021 and their operating results are consolidated in our Consolidated Statements of Loss and the minority interest is presented in Net Loss Attributable to Non-controlling Interests, Net of Tax for the three and nine months endedSeptember 30, 2022 . For a discussion of our segmented results, please see "Segmented Results of Operations" below. The financial results of our Canadian subsidiaries have been impacted by the strengthening of theU.S. dollar versus the Canadian dollar in 2022 as compared to 2021 which negatively impacts the results ofCanadian Cannabis and Village Farms Canada LP when translated toU.S. currency. CONSOLIDATED RESULTS
Three Months Ended
Sales Sales for the three months endedSeptember 30, 2022 were$71,056 as compared to$72,442 for the three months endedSeptember 30, 2021 . The decrease in sales of ($1,386 ) or (2%) was attributable to a decrease from VF Fresh, driven by the factors discussed below in "Produce Segment Results - VF Fresh", and was partially offset by the inclusion ofRose LifeScience and Balanced Health's full quarterly sales in our 2022 results as well as revenue growth in both of our cannabis operating segments. VF Fresh's sales decreased ($5,508 ), Canadian Cannabis increased$3,001 ,U.S. Cannabis increased$1,297 and Clean Energy decreased ($176 ) for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . TheU.S. dollar strengthened versus the Canadian dollar in 2022 and the impact to Canadian Cannabis net sales was ($1,023 ) utilizing the currency conversion rates for the three months endedSeptember 30, 2022 as compared to the currency conversion rates for the three months endedSeptember 30, 2021 .
Cost of Sales
Cost of sales for the three months endedSeptember 30, 2022 were$62,682 as compared to$54,693 for the three months endedSeptember 30, 2021 . The increase in cost of sales of ($7,989 ) or (15%) was attributable to the inclusion ofRose LifeScience and Balanced Health's full quarterly cost of sales in our 2022 results as well as revenue growth in our cannabis operating segments along with inflationary effects on supply chain costs, labor and freight expenses. For the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 , the cost of sales for VF Fresh decreased$152 , Canadian Cannabis increased ($7,951 ) andU.S. Cannabis increased ($381 ). For Canadian Cannabis, the cost of sales for the three months endedSeptember 30, 2022 includes a ($1,404 ) catch-up of intangible amortization resulting from theSeptember 30, 2022 finalization of the Rose purchase price accounting from its acquisition date ofNovember 15, 2021 , of which$351 relates to Q3 2022 and$1,053 relates to prior periods. See Part 1, Item 1, Note 7 "Business Combinations" for additional details. For the Clean Energy segment, cost of sales decreased$191 as Clean Energy shut down its power plant onApril 30, 2022 in preparation for the transition to renewable natural gas operations.
Gross Margin
Gross margin for the three months endedSeptember 30, 2022 decreased ($9,375 ) to$8,374 , or a 12% gross margin, in comparison to$17,749 , or a 25% gross margin, for the three months endedSeptember 30, 2021 . The negative variance between periods is primarily attributable to a lower gross margin from VF Fresh of ($5,356 ) and Canadian Cannabis of ($4,950 ), partially offset by higher gross margin fromU.S. Cannabis of$916 . See "Segmented Results of Operations" below for more information. TheU.S. dollar strengthened versus the Canadian dollar in 2022 and the impact to Canadian Cannabis gross margin was ($327 ) utilizing the currency conversion rates for the three months endedSeptember 30, 2022 as compared to the currency conversion rates for the three months endedSeptember 30, 2021 .
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months endedSeptember 30, 2022 increased$3,736 to$16,868 or 24% of sales compared to$13,132 or 18% of sales for the three months endedSeptember 30, 2021 . The increase in selling, general and administrative expenses was primarily due to the acquisition ofBalanced Health and Rose LifeScience and the inclusion of their respective expenses for the three months endedSeptember 30, 2022 . Corporate expenses decreased ($599 ) due primarily to 19 -------------------------------------------------------------------------------- incremental Q3 2021 legal and closing fees associated with theBalanced Health acquisition, partially offset by an increase in Q3 2022 audit, regulatory and compliance fees. Share-Based Compensation Share-based compensation expenses for the three months endedSeptember 30, 2022 were$926 as compared to$1,820 for the three months endedSeptember 30, 2021 . The decrease in share-based compensation was primarily due to the vesting of performance shares earned by key corporate and operations employees in Q3 2021 as compared to Q3 2022.
Net (Loss) Income Attributable to
Net loss for the three months endedSeptember 30, 2022 was ($8,745 ) as compared to net income of$745 for the three months endedSeptember 30, 2021 . The decrease in net income was primarily due to reduced operating performance from VF Fresh and Canadian Cannabis, partially offset by higher operating profit fromU.S. Cannabis for the three months endedSeptember 30, 2022 as compared toSeptember 30, 2021 .
Adjusted EBITDA
Adjusted EBITDA for the three months endedSeptember 30, 2022 was ($2,233 ) compared to$6,933 for the three months endedSeptember 30, 2021 . The decrease in adjusted EBITDA was primarily due to lower operating results of VF Fresh and Canadian Cannabis. See the reconciliation of Adjusted EBITDA to net income in "Non-GAAP Measures-Reconciliation of Net Earnings to Adjusted EBITDA".
Nine Months Ended
Sales Sales for the nine months endedSeptember 30, 2022 were$224,115 as compared to$195,212 for the nine months endedSeptember 30, 2021 . The increase in sales of$28,903 or 15% was attributable to the inclusion ofRose LifeScience and Balanced Health for the full nine-month period in 2022 compared to the same comparable period in 2021, as well as revenue growth in our key operating segments: VF Fresh, Canadian Cannabis andU.S. Cannabis. VF Fresh's sales increased$2,611 , Canadian Cannabis increased$12,342 andU.S. Cannabis increased$14,133 for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . TheU.S. dollar strengthened versus the Canadian dollar in 2022 and the impact to Canadian Cannabis net sales was ($2,093 ) utilizing the currency conversion rates for the nine months endedSeptember 30, 2022 as compared to the currency conversion rates for the nine months endedSeptember 30, 2021 .
Cost of Sales
Cost of sales for the nine months endedSeptember 30, 2022 were$199,514 as compared to$169,891 for the nine months endedSeptember 30, 2021 . The increase in cost of sales of ($29,623 ) or (17%) was due to the inclusion ofRose LifeScience and Balanced Health for the full nine-month period in 2022 compared to the same comparable period in 2021, as well as revenue growth in our key operating segments along with inflationary effects on supply chain costs, labor and freight expenses. The cost of sales increase was attributable to increases in VF Fresh of ($18,127 ), Canadian Cannabis of ($8,306 ) and higherU.S. Cannabis costs of ($4,668 ), partially offset by lower Clean Energy costs of$1,478 . The 2022 Canadian Cannabis cost of sales includes a$3,536 positive adjustment and the ($1,404 ) cost of sales due to the catch-up of Rose intangible amortization, and the 2021 Canadian Cannabis cost of sales includes a ($1,841 ) charge from the revaluation of Pure Sunfarms inventory to fair value at acquisition date and our 2021 produce costs include incremental utility charges of ($1,400 ) associated with theTexas freeze ofFebruary 2021 . The decrease in Clean Energy costs were driven by higher depreciation charges in 2021 as the depreciable life of VFCE assets have been accelerated due to the upcoming transition of operations to theDelta RNG Project expected to become operational in mid-2023.
Gross Margin
Gross margin for the nine months endedSeptember 30, 2022 decreased ($720 ) to$24,601 , or an 11% gross margin, in comparison to$25,321 , or a 13% gross margin, for the nine months endedSeptember 30, 2021 . Excluding the$3,536 positive adjustment from the revaluation of Pure Sunfarms' inventory to fair value at acquisition date and ($1,404 ) catch-up of Rose intangible amortization, gross margin for the nine months endedSeptember 30, 2022 was$22,469 , or 10% gross margin. Excluding the ($1,841 ) charge from the revaluation of Pure Sunfarms' inventory to fair value at acquisition date and ($1,400 ) from the incrementalTexas freeze utility expenses, gross margin for the nine months endedSeptember 30, 2021 was$28,562 , or a 15% gross margin. The year-over-year decrease in gross margin of ($720 ) was primarily due to lower VF Fresh gross margin of ($15,516 ), which was driven by the factors described above for the quarter, partially offset by increases in gross margin for Canadian Cannabis of$4,036 ,U.S. Cannabis of$9,465 and Clean Energy of$1,295 . TheU.S. dollar strengthened versus the Canadian dollar in 2022 and the impact to Canadian 20 --------------------------------------------------------------------------------
Cannabis gross margin was (
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months endedSeptember 30, 2022 increased$20,992 to$51,241 or 23% of sales compared to$30,249 or 15% of sales for the nine months endedSeptember 30, 2021 . The increase in year-over-year expenses was driven by an increase of$10,150 fromU.S. Cannabis due to the inclusion ofU.S. Cannabis expenses for the entire nine-month period in 2022, versus only a portion of the same period in 2021, asBalanced Health was acquired onAugust 16, 2021 and higher Canadian Cannabis expenses of$9,244 due to the acquisition of Rose along with higher planned incremental investment in headcount, marketing, regulatory fees and IT services to support the growth of the Canadian Cannabis business. In addition, the year-over-year selling, general and administrative expenses of VF Fresh increased$989 primarily due to higher legal and audit fees and Corporate expenses increased$699 due to 2022 costs associated with the start-up of Leli and our development team and an increase in compensation, audit, regulatory and compliance fees, partially offset by lower legal and closing expenses incurred in 2021 associated with the acquisition ofBalanced Health .
Share-Based Compensation
Share-based compensation expenses for the nine months endedSeptember 30, 2022 were$3,004 as compared to$5,705 for the nine months endedSeptember 30, 2021 . The decrease in share-based compensation was primarily due to the vesting of performance shares earned by key operations employees in Q1 2021 and no performance shares earned in 2022.
Write-off of Joint Venture Loan
The write-off of joint venture loan for the nine months endedSeptember 30, 2022 of ($592 ) was due to the write down of VF Hemp inventory during the second quarter which subsequently led to the Company writing off its remaining loan balance to VF Hemp. Impairments The impairments on our goodwill and intangible assets for the nine months endedSeptember 30, 2022 was ($29,799 ). The Company considered qualitative factors in assessing impairment indicators and concluded atJune 30, 2022 , an impairment trigger existed. The impact to goodwill of ($25,169 ) and intangible assets of ($4,630 ) were triggered by inflationary effects on consumer spending, decreases in market capitalization of CBD companies and the continued federal regulation lack of clarity with respect to CBD. We evaluated forecasts of ourU.S. Cannabis business segment and a reduction in market transaction multiples for CBD companies in our valuation and impairment conclusions. Subsequent toJune 30, 2022 , the Company has not identified any additional impairment triggers. See Part 1, Item 1 Note 6 "Goodwill and Intangible Assets" for additional details.
Loss from Equity Method Investments
The loss from equity method investments for the nine months endedSeptember 30, 2022 of ($2,667 ) was due to losses from VF Hemp and consisted primarily of the write down of VF Hemp inventory during the second quarter. VF Hemp is not currently cultivating hemp as we await FDA clarity on the use of CBD.
Net Loss Attributable to
Net loss for the nine months endedSeptember 30, 2022 was ($51,817 ) as compared to ($11,154 ) for the nine months endedSeptember 30, 2021 . The increase in net loss for the nine months endedSeptember 30, 2022 as compared toSeptember 30, 2021 was primarily due toU.S. Cannabis impairments on goodwill and intangible assets, lower operating profit of the produce and Canadian Cannabis operations and the loss from VF Hemp. Adjusted EBITDA Adjusted EBITDA for the nine months endedSeptember 30, 2022 was ($18,358 ) compared to$9,183 for the nine months endedSeptember 30, 2021 . The decrease in adjusted EBITDA was primarily due to lower operating results from our produce business, the loss incurred by VF Hemp and a lower contribution of Adjusted EBITDA from Canadian Cannabis due to higher selling, general and administrative fees as a percentage of net sales along with the effect of the purchase price inventory adjustments on the calculation of Adjusted EBITDA. See the reconciliation of Adjusted EBITDA to net income in "Non-GAAP Measures-Reconciliation of Net Earnings to Adjusted EBITDA". 21 -------------------------------------------------------------------------------- SEGMENTED RESULTS OF OPERATIONS (In thousands ofU.S. dollars, except per share amounts, and unless otherwise noted) For the Three Months Ended September 30, 2022 VF Fresh Cannabis Cannabis Clean (Produce) Canada (1) U.S. (1) Energy Corporate Total Sales$ 35,527 $ 30,394 $ 5,135 $ - $ -$ 71,056 Cost of sales (38,830 ) (22,196 ) (1,612 ) (44 ) - (62,682 ) Selling, general and administrative expenses (2,777 ) (7,574 ) (3,655 ) (14 ) (2,848 ) (16,868 ) Share-based compensation - (311 ) (65 ) - (550 ) (926 ) Other expense, net (344 ) (513 ) (142 ) - (1,896 ) (2,895 ) Recovery of (provision for) income taxes 1,780 (38 ) - - 1,441 3,183
Loss from consolidated entities (4,644 ) (238 ) (339 )
(58 ) (3,853 ) (9,132 )
Less: net loss attributable to
non-controlling interests, net
of tax - 387 - - - 387
Net (loss) income (4,644 ) 149 (339 ) (58 ) (3,853 ) (8,745 )
Adjusted EBITDA (3) $ (4,879 ) $ 5,417 $ 10 $ (58 ) $ (2,723 ) $ (2,233 )
Basic (loss) income per share $ (0.05 ) $ 0.00 $ (0.00 ) $ (0.00 ) $ (0.04 ) $ (0.10 )
Diluted (loss) income per share $ (0.05 ) $ 0.00 $ (0.00 ) $ (0.00 ) $ (0.04 ) $ (0.10 )
For the Three Months
Ended
VF Fresh Cannabis Cannabis Clean
(Produce) Canada (1) U.S. (1) Energy Corporate Total
Sales $ 41,152 $ 27,393 $ 3,838 $ 59 $ - $ 72,442
Cost of sales (39,099 ) (14,244 ) (1,231 ) (119 ) - (54,693 )
Selling, general and
administrative expenses (2,239 ) (5,324 ) (2,063 ) (59 ) (3,447 ) (13,132 )
Share-based compensation - (186 ) (63 ) - (1,571 ) (1,820 )
Other income (expense), net (798 ) 112 (181 ) (8 ) (133 ) (1,008 )
Recovery of (provision for)
income taxes (497 ) (2,024 ) - - 1,444 (1,077 )
(Loss) income from consolidated
entities (1,481 ) 5,727 300 (127 ) (3,707 ) 712
Income from equity method
investments - - 33 - - 33
Net (loss) income (1,481 ) 5,727 333 (127 ) (3,707 ) 745
Adjusted EBITDA (3) 1,334 8,775 659 (118 ) (3,717 ) $ 6,933
Basic (loss) income per share $ (0.03 ) $ 0.07 $ 0.00 $ (0.00 ) $ (0.03 ) $ 0.01
Diluted (loss) income per share $ (0.03 ) $ 0.07 $ 0.00 $ (0.00 ) $ (0.03 ) $ 0.01
For the Nine Months Ended September 30, 2022
VF Fresh Cannabis Cannabis Clean
(Produce) Canada (1) U.S. (1) Energy Corporate Total
Sales $ 124,052 $ 81,956 $ 17,971 $ 136 $ - $ 224,115
Cost of sales (140,612 ) (52,740 ) (5,899 ) (263 ) - (199,514 )
Selling, general and
administrative expenses (8,725 ) (22,904 ) (12,213 ) (53 ) (7,346 ) (51,241 )
Share-based compensation - (897 ) (267 ) - (1,840 ) (3,004 )
Other expense, net (776 ) (1,490 ) (154 ) (6 ) (1,953 ) (4,379 )
Write-off of joint venture loan - - (592 ) - - (592 )
Impairments (2) - - (29,799 ) - - (29,799 )
Recovery of (provision for)
income taxes 6,322 (1,668 ) 7,025 - 2,884 14,563
(Loss) income from consolidated
entities (19,739 ) 2,257 (23,928 ) (186 ) (8,255 ) (49,851 )
Less: net loss attributable to
non-controlling interests, net
of tax - 701 - - - 701
Loss from equity method
investments - - (2,667 ) - - (2,667 )
Net (loss) income (19,739 ) 2,958 (26,595 ) (186 ) (8,255 ) (51,817 )
Adjusted EBITDA (3) $ (21,362 ) $ 10,558 $ (43 ) $ (180 ) $ (7,331 ) $ (18,358 )
Basic (loss) income per share $ (0.22 ) $ 0.03 $ (0.29 ) $ (0.00 ) $ (0.10 ) $ (0.59 )
Diluted (loss) income per share $ (0.22 ) $ 0.03 $ (0.29 ) $ (0.00 ) $ (0.10 ) $ (0.59 )
22
--------------------------------------------------------------------------------
For the Nine Months Ended September 30, 2021
VF Fresh Cannabis Cannabis Clean
(Produce) Canada (1) U.S. (1) Energy Corporate Total
Sales $ 121,558 $ 69,614 $ 3,838 $ 202 $ - $ 195,212
Cost of sales (122,486 ) (44,433 ) (1,231 ) (1,741 ) - (169,891 )
Selling, general and
administrative expenses (7,736 ) (13,660 ) (2,063 ) (143 ) (6,647 ) (30,249 )
Share-based compensation - (1,471 ) (63 ) - (4,171 ) (5,705 )
Other expense, net (798 ) (1,282 ) (181 ) (29 ) (599 ) (2,889 )
Recovery of (provision for)
income taxes 2,875 (2,654 ) - - 2,322 2,543
(Loss) income from consolidated
entities (6,587 ) 6,114 300 (1,711 ) (9,095 ) (10,979 )
Less: net (income) loss
attributable to non-controlling
interests, net of tax - - - - - -
Loss from equity method
investments - - (175 ) - - (175 )
Net (loss) income (6,587 ) 6,114 125 (1,711 ) (9,095 ) (11,154 )
Adjusted EBITDA (3) (3,138 ) 18,977 532 (269 ) (6,919 ) $ 9,183
Basic (loss) income per share $ (0.08 ) $ 0.08 $ 0.00 $ (0.02 ) $ (0.12 ) $ (0.14 )
Diluted (loss) income per share $ (0.08 ) $ 0.08 $ 0.00 (1)
For the three and nine months endedSeptember 30, 2022 ,Balanced Health's financial results are fully consolidated in the financial results of the Company andVillage Farms' share of Rose LifeScience's financial results are fully consolidated in the financial results of the Company with the minority non-controlling interest presented in net loss attributable to non-controlling interests, net of tax. For the three and nine months endedSeptember 30, 2021 ,Balanced Health's post-acquisition financial results forAugust 16, 2021 throughSeptember 30, 2021 are fully consolidated in the financial results of the Company. (2) Consists of impairments to goodwill of ($25,169 ) and intangible assets of ($4,630 ) that were triggered by inflationary effects on consumer spending, decreases in market capitalization of CBD companies and the continued lack of clarity with respect to federal regulation of CBD. See Part 1, Item 1 Note 6 "Goodwill and Intangible Assets" for additional details. (3) Adjusted EBITDA is not a recognized earnings measure and does not have a standardized meaning prescribed by GAAP. Therefore, Adjusted EBITDA may not be comparable to similar measures presented by other issuers. Management believes that Adjusted EBITDA is a useful supplemental measure in evaluating the performance of the Company because it excludes non-recurring and other items that do not reflect our business performance. Adjusted EBITDA includes the Company's 70% interest in Rose LifeScience since acquisition and 65% interest in VFH.
CANNABIS SEGMENT RESULTS -
The Canadian Cannabis segment currently consists of Pure Sunfarms and Rose LifeScience. The comparative analysis for Canadian Cannabis is based on the consolidated results of Pure Sunfarms and Rose LifeScience for the three and nine months endedSeptember 30, 2022 and the results of Pure Sunfarms for the three and nine months endedSeptember 30, 2021 . The Company acquired 70% of Rose LifeScience onNovember 15, 2021 and as such the operating results of Rose LifeScience fromJanuary 1, 2022 toSeptember 30, 2022 are consolidated in our results for the three and nine months endedSeptember 30, 2022 with the minority interest presented in Net Income (Loss) Attributable to Non-controlling Interests, Net of Tax. The financial results of our Canadian subsidiaries have been impacted by the strengthening of theU.S. dollar versus the Canadian dollar in 2022 as compared to 2021 which negatively impacts the results of the Canadian Cannabis segment when translated toU.S. currency.
Three Months Ended
Sales Canadian Cannabis net sales for the three months endedSeptember 30, 2022 were$30,394 as compared to$27,393 for the three months endedSeptember 30, 2021 . The period-over-period net sales increase of$3,001 or 11% includes net sales from Rose in Q3 2022. The increase between comparable quarters was driven by a 46% increase in branded sales partially offset by a (50%) decrease in non-branded sales. Rose also contributed$707 in commission revenue that is included in net sales. The 46% increase in branded sales was attained through the addition of Rose branded sales in Q3 2022 and increased sales inOntario andAlberta as well as expansion into the provinces and territories ofNew Brunswick ,Yukon andNewfoundland andLabrador . Canadian Cannabis revenue growth was primarily in the large format-single, pre-rolls and milled flower offset by a decrease in cannabis derivative products for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . The (50%) decrease in non-branded sales was primarily due to an oversupplied LP market, particularly for lower specification biomass. For the three months endedSeptember 30, 2022 , 81% of revenue was generated from branded flower, inclusive of pre-rolls, 4% of revenue from cannabis derivative products and 15% from non-branded sales as compared to 59% of revenue from branded flower, inclusive of pre-rolls, 7% from cannabis derivative products and 34% from non-branded sales for the three months endedSeptember 30, 2021 . TheU.S. dollar strengthened versus the Canadian dollar in 2022 and the impact to net sales was ($1,023 ) utilizing the currency conversion rates for the three months endedSeptember 30, 2022 as compared to the currency conversion rates for the three months endedSeptember 30, 2021 .
Cost of Sales
Canadian Cannabis cost of sales for the three months endedSeptember 30, 2022 were$22,196 as compared to$14,244 for the three months endedSeptember 30, 2021 . The period-over-period cost of sales increase of ($7,952 ) or (56%) includes Q3 2022 cost of sales from Rose and was primarily due to increases in Canadian Cannabis kilograms produced, packaged and sold of branded 23 -------------------------------------------------------------------------------- products in Q3 2022 as compared to Q3 2021. In addition, the Q3 2022 Canadian Cannabis cost of sales includes a charge of ($279 ) and the Q3 2021 Canadian Cannabis cost of sales includes a$1,217 reduction from the revaluation of Pure Sunfarms' inventory to fair value at acquisition date ofNovember 2, 2020 . For Canadian Cannabis, the cost of sales for the three months endedSeptember 30, 2022 includes a ($1,404 ) catch-up of intangible amortization resulting from theSeptember 30, 2022 finalization of the Rose purchase price accounting from its acquisition date ofNovember 15, 2021 , of which$351 relates to Q3 2022 and$1,053 relates to prior periods. See Part 1, Item 1, Note 7 "Business Combinations" for additional details.
Gross Margin
Canadian Cannabis gross margin for the three months endedSeptember 30, 2022 decreased ($4,951 ) to$8,198 , or a 27% gross margin, in comparison to$13,149 , or a 48% gross margin, for the three months endedSeptember 30, 2021 . Gross margin for the three months endedSeptember 30, 2022 decreased ($2,051 ) to$9,881 , or a 33% gross margin (excluding the purchase price inventory charge of$279 and$1,404 cost of sales for the catch-up of Rose intangible amortization) in comparison to$11,932 , or a 44% gross margin (excluding the purchase price inventory adjustment positive adjustment of$1,217 ), for the three months endedSeptember 30, 2021 . The decrease in gross margin of ($4,950 ) between comparable periods was due to the greater percentage of branded sales which carry increased costs due to additional processing and packaging along with price compression experienced across various provincial markets in Q3 2022 as compared to Q3 2021. TheU.S. dollar strengthened versus the Canadian dollar in 2022 and the impact to gross margin was ($327 ) utilizing the currency conversion rates for the three months endedSeptember 30, 2022 as compared to the currency conversion rates for the three months endedSeptember 30, 2021 .
Selling, General and Administrative Expenses
Canadian Cannabis selling, general and administrative expenses for the three months endedSeptember 30, 2022 increased$2,250 to$7,574 or 25% of sales compared to$5,324 or 19% of sales for the three months endedSeptember 30, 2021 . The increase in selling, general and administrative expenses in Q3 2022 was due to the inclusion of Rose expenses and planned incremental investment in sales support and marketing campaigns for the higher volume of sales along with additional headcount, IT services, regulatory and compliance fees to support the growth of the Canadian Cannabis segment.
Share-Based Compensation
Canadian Cannabis share-based compensation expenses for the three months endedSeptember 30, 2022 were$311 as compared to$186 for the three months endedSeptember 30, 2021 . The year-over-year increase in share-based compensation was primarily due to a greater number of options issued to key Canadian Cannabis employees in 2022. Net Income Canadian Cannabis net income for the three months endedSeptember 30, 2022 was$149 compared to net income of$5,727 for the three months endedSeptember 30, 2021 . The decrease in net income between periods was primarily due to lower gross margin and higher selling, general and administrative expenses for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 .
Adjusted EBITDA
Adjusted EBITDA for the three months endedSeptember 30, 2022 andSeptember 30, 2021 was$5,417 and$8,775 , respectively. The lower Adjusted EBITDA between periods was primarily due to a lower gross margin and higher selling, general and administrative expenses in Q3 2022 as compared to Q3 2021. See the reconciliation of Adjusted EBITDA to net income in "Non-GAAP Measures-Reconciliation of Net Earnings to Adjusted EBITDA".
Nine Months Ended
Sales Canadian Cannabis net sales for the nine months endedSeptember 30, 2022 were$81,956 as compared to$69,614 for the nine months endedSeptember 30, 2021 . The period-over-period net sales increase of$12,342 or 18% includes net sales from Rose for the nine months endedSeptember 30, 2022 . The increase between comparable periods was driven by a 25% increase in branded sales partially offset by an (2%) decrease in non-branded sales. Rose also contributed$2,316 in commission revenue that is included in net sales. The 25% increase in branded sales was largely due to an increase in provincial sales inOntario ,New Brunswick andManitoba along with Rose branded sales toQuebec , partially offset by a decrease in sales from the provinces ofBritish Columbia ,Alberta andSaskatchewan for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . In addition, the Canadian Cannabis industry has experienced price compression in 2022 as compared to 2021 which has affected branded products, flower and trim due to factors such as price competition by retailers and producers, price-sensitive consumer habits and some LPs reducing prices to attain cash or capture market share. The key branded formats experiencing growth are large format-single and pre-rolls along with the addition of milled flower in 2022. The (2%) decrease in non-branded sales was primarily due to price compression from an oversupplied LP market as Canadian Cannabis sold 33% more kilograms in the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , 72% of revenue was 24 -------------------------------------------------------------------------------- generated from branded flower, inclusive of pre-rolls, 5% of revenue from cannabis derivative products and 23% from non-branded sales as compared to 64% of revenue from branded flower, inclusive of pre-rolls, 9% from cannabis derivative products and 27% from non-branded sales for the nine months endedSeptember 30, 2021 . TheU.S. dollar strengthened versus the Canadian dollar in 2022 and the impact to net sales was ($2,093 ) utilizing the currency conversion rates for the nine months endedSeptember 30, 2022 as compared to the currency conversion rates for the nine months endedSeptember 30, 2021 .
Cost of Sales
Canadian Cannabis cost of sales for the nine months endedSeptember 30, 2022 were$52,740 as compared to$44,433 for the nine months endedSeptember 30, 2021 . The period-over-period cost of sales increase of ($8,307 ) or (19%) includes the 2022 cost of sales from Rose and was primarily due to increases in Canadian Cannabis kilograms produced and sold of both branded and non-branded products from a larger cultivation footprint in 2022 as compared to 2021 and the higher percentage and growth of branded sales which incur incremental processing and packaging costs. In addition, the 2022 Canadian Cannabis cost of sales includes a positive adjustment of$3,536 and the 2021 Canadian Cannabis cost of sales includes a ($1,841 ) charge from the revaluation of Pure Sunfarms' inventory to fair value at acquisition date ofNovember 2, 2020 . For Canadian Cannabis, the cost of sales for the nine months endedSeptember 30, 2022 includes a ($1,404 ) catch-up of intangible amortization resulting from theSeptember 30, 2022 finalization of the Rose purchase price accounting from its acquisition date ofNovember 15, 2021 . See Part 1, Item 1, Note 7 "Business Combinations" for additional details.
Gross Margin
Canadian Cannabis gross margin for the nine months endedSeptember 30, 2022 increased$4,036 to$29,216 , or a 36% gross margin, in comparison to$25,181 , or a 36% gross margin, for the nine months endedSeptember 30, 2021 . Gross margin for the nine months endedSeptember 30, 2022 increased$62 to$27,084 , or a 33% gross margin (excluding the purchase price inventory positive adjustment of$3,536 and$1,404 cost of sales for the catch-up of Rose intangible amortization) in comparison to$27,022 , or a 39% gross margin (excluding the purchase price inventory adjustment charge of$1,841 ), for the nine months endedSeptember 30, 2021 . The increase in gross margin of$4,036 was primarily due to the increase in net sales and the production of cannabis from a larger cultivation footprint in 2022 as compared to 2021 which decreases the cost per gram. TheU.S. dollar strengthened versus the Canadian dollar in 2022 and the impact to gross margin was ($727 ) utilizing the currency conversion rates for the nine months endedSeptember 30, 2022 as compared to the currency conversion rates for the nine months endedSeptember 30, 2021 .
Selling, General and Administrative Expenses
Canadian Cannabis selling, general and administrative expenses for the nine months endedSeptember 30, 2022 increased$9,244 to$22,904 or 28% of net sales compared to$13,660 or 20% of net sales for the nine months endedSeptember 30, 2021 . The increase in selling, general and administrative expenses in 2022 was due to the inclusion of Rose expenses and planned incremental investment in sales support and marketing campaigns for the higher volume of sales along with additional headcount, IT services, regulatory and compliance fees to support the growth of the Canadian Cannabis segment.
Share-Based Compensation
Canadian Cannabis share-based compensation expenses for the nine months endedSeptember 30, 2022 were$897 as compared to$1,471 for the nine months endedSeptember 30, 2021 . The year-over-year decrease in share-based compensation was primarily due to the vesting of performance share grants for Pure Sunfarms' management for the nine months endedSeptember 30, 2021 versus no performance shares in 2022. Net Income Canadian Cannabis net income for the nine months endedSeptember 30, 2022 was$2,958 compared to$6,114 for the nine months endedSeptember 30, 2021 . The decrease in net income was primarily due to higher selling, general and administrative expenses, partially offset by higher gross margin for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . Adjusted EBITDA Adjusted EBITDA for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 was$10,558 and$18,977 , respectively. The lower Adjusted EBITDA between periods was primarily due to higher selling, general and administrative as a percentage of sales expenses in 2022 along with the effect of the purchase price inventory adjustments on the calculation of Adjusted 25 --------------------------------------------------------------------------------
EBITDA. See the reconciliation of Adjusted EBITDA to net income in "Non-GAAP Measures-Reconciliation of Net Earnings to Adjusted EBITDA".
PRODUCE SEGMENT RESULTS - VF FRESH
The produce segment, VF Fresh, currently consists of
Three Months Ended
Sales VF Fresh sales for three months endedSeptember 30, 2022 were$35,527 as compared to$41,152 for the three months endedSeptember 30, 2021 . The decrease in sales of ($5,625 ) or (13%) was due to decreases in our own produce revenues of ($4,556 ) and lower grower partner revenues of ($1,069 ). The decrease in our own produce revenues was primarily due to a decrease in tomato volume of (15%) from ourTexas andDelta greenhouses while the selling price of our own tomatoes decreased (22%) due to a change in sales mix to a lower percentage of higher priced specialty tomatoes. The tomato brown rugose fruit virus ("ToBRFV") negatively affected our tomato crops inTexas ,Delta and from our grower partners inMexico andCanada , reducing the overall yield and in some cases decimating entire higher priced specialty crops. Additionally, ourTexas 2022-23 crop cycle is delayed as compared to ourTexas 2021-22 crop cycle due to a post-COVID administrative change in theU.S. H-2A temporary agricultural program. The decrease in grower partner revenues was primarily due to an (11%) decrease in purchased tomato production and a (7%) decrease in selling price, partially offset by higher purchased pepper and cucumber production for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 .
Cost of Sales
VF Fresh cost of sales for three months endedSeptember 30, 2022 were$38,830 as compared to$39,099 for the three months endedSeptember 30, 2021 . Cost of sales decreased$269 due to a decrease in our grower partner cost of sales of$937 , partially offset by an increase in our own produce cost of sales of ($668 ). The decrease in grower partner cost of sales was primarily due to lower volumes of purchased tomatoes, partially offset by higher volumes of purchased peppers and cucumbers and incremental freight costs. Although our own tomato volume decreased (15%), our own production cost of sales increased due to inflationary effects on items such as labor, freight, packaging and fertilizer which negatively affected our cost per pound. During the third quarter of 2022, most of ourTexas greenhouse crop cycles were in the early stages of their 2022-23 cycle and onlyFort Davis was producing tomatoes prior to quarter end.
Gross Margin
The gross margin for VF Fresh was ($3,303 ) for three months endedSeptember 30, 2022 as compared to$2,053 for the three months endedSeptember 30, 2021 . The decrease in gross margin was primarily affected by the decrease in sales from both our own production and our grower partners as gross margin for our own production decreased ($5,224 ) due to lower volume of our higher priced specialty crops as a result of ToBRFV and higher cost per pound due to inflationary effects from freight, labor and supply chain items and grower partner gross margin decreased ($132 ) mostly due to a reduction in purchased tomato production.
Selling, General and Administrative Expenses
VF Fresh selling, general and administrative expenses for three months endedSeptember 30, 2022 were$2,777 or 8% of sales as compared to$2,239 or 5% of sales for the three months endedSeptember 30, 2021 . The quarter-over-quarter increase in selling, general and administrative expenses was primarily due to higher legal and professional fees incurred in Q3 2022 as compared to Q3 2021.
Net Loss
VF Fresh's net loss for three months endedSeptember 30, 2022 was ($4,644 ) as compared to ($1,481 ) for the three months endedSeptember 30, 2021 . The increase in net loss is primarily due to the lower gross margin from our own production driven by the decrease in sales for three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 .
Adjusted EBITDA
The Adjusted EBITDA for VF Fresh was ($4,879 ) for three months endedSeptember 30, 2022 as compared to$1,334 for the three months endedSeptember 30, 2021 . The lower Adjusted EBITDA was primarily due to a decrease in operating margin of ($5,894 ) for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . The primary reasons for the operating margin decline were the lower sales from both our own production and our grower partners and higher 26 -------------------------------------------------------------------------------- selling, general and administrative expenses in third quarter of 2022 as compared to the third quarter of 2021. See the reconciliation of Adjusted EBITDA to net income in "Non-GAAP Measures-Reconciliation of Net Earnings to Adjusted EBITDA".
Nine Months Ended
Sales VF Fresh sales for nine months endedSeptember 30, 2022 were$124,052 as compared to$121,558 for the nine months endedSeptember 30, 2021 . The increase in sales of$2,494 or 2% was due to increases in our own produce revenues of$3,719 partially offset by a decrease from our grower partner revenues of ($1,225 ). The increase in our own produce revenues was primarily due to an increase in tomato volume of 17% from ourTexas greenhouses partially offset by a (19%) decrease in tomato volume from ourDelta greenhouse. The tomato crop atDelta was negatively affected by the ToBRFV, especially in its specialty tomato varieties while ourFort Davis greenhouse drove the increased yield inTexas . The decrease in grower partner revenues was primarily due to lower volumes of purchased production of tomatoes, partially offset by higher volumes of purchased production of peppers, cucumbers and mini-cucumbers.
Cost of Sales
VF Fresh cost of sales for nine months endedSeptember 30, 2022 were$140,612 as compared to$122,486 for the nine months endedSeptember 30, 2021 . Cost of sales increased ($18,126 ) or (15%) due to increases in our own produce cost of sales of ($17,716 ) and our grower partner cost of sales of ($410 ). The increase in our own produce cost of sales was driven by the increase in tomato volume at ourTexas greenhouses as well as an increase in the sales mix for specialty tomatoes which require higher costs for cultivation and packaging. The increase in volume and an incremental increase in freight costs due to trucker shortages and fuel increases drove higher transportation and handling costs of produce in 2022 as compared to 2021. In addition, in the nine months endedSeptember 30, 2022 , we incurred an incremental catch up to our cost of sales on ourTexas crop cycle that began in summer/fall 2021 and ended in early Q3 2022 due to lower total crop volume and higher cost of production for the growing cycle due to ongoing disease pressure and supply chain cost increases, effectively increasing our production price per pound for both ourTexas andDelta tomato crops. The increase in grower partner cost of sales was driven by an incremental increase in freight costs, partially offset by lower volumes of produce pounds purchased in 2022 as compared to 2021. Our facility management has implemented changes to increase crop yield and reduce cost per pound, however our efforts could not mitigate the increases in supply chain costs, effects of the ToBRFV and incremental freight experienced in 2022.
Gross Margin
The gross margin for VF Fresh was ($16,560 ) for nine months endedSeptember 30, 2022 as compared to ($928 ) for the nine months endedSeptember 30, 2021 . Gross margin in the nine months endedSeptember 30, 2022 has been greatly affected by the higher cost of sales, which was attributable to additional freight per pound, a revised production forecast and higher cultivation costs in ourTexas andDelta facilities and lower grower partner gross margin of ($1,635 ). The higher freight per pound increase was mostly due to increases in fuel prices and trucker shortages which we were not able to pass on to our customers.
Selling, General and Administrative Expenses
VF Fresh selling, general and administrative expenses for nine months endedSeptember 30, 2022 were$8,725 or 7% of sales as compared to$7,736 or 6% of sales for the nine months endedSeptember 30, 2021 . The increase in selling, general and administrative expenses was primarily due to incremental legal and professional fees and higher audit and compliance fees in the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 .
Net Loss
VF Fresh's net loss for nine months endedSeptember 30, 2022 was ($19,739 ) as compared to ($6,587 ) for the nine months endedSeptember 30, 2021 . The increase in net loss for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 was primarily due to the higher cost of sales that resulted in lower gross margin in 2022.
Adjusted EBITDA
The Adjusted EBITDA for VF Fresh was ($21,362 ) for nine months endedSeptember 30, 2022 as compared to ($3,138 ) for the nine months endedSeptember 30, 2021 . The lower Adjusted EBITDA was primarily due to a decrease in operating margin of ($16,505 ) for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . See the reconciliation of Adjusted EBITDA to net income in "Non-GAAP Measures-Reconciliation of Net Earnings to Adjusted EBITDA".
CANNABIS SEGMENT RESULTS -
TheU.S. Cannabis segment currently consists ofBalanced Health and VF Hemp. For the three and nine months endedSeptember 30, 2022 ,U.S. Cannabis financial results are based on the consolidated results ofBalanced Health from the closing date of the acquisition ofAugust 16, 2021 . VF Hemp is a joint venture, and its results are included in "Loss from Equity Method Investments" for the three and nine months endedSeptember 30, 2022 . 27 --------------------------------------------------------------------------------
Three Months Ended
Sales
U.S. Cannabis sales for the three months endedSeptember 30, 2022 were$5,135 . Over 99% of sales were generated inthe United States and gross sales were composed of 82% from e-commerce sales, 13% from retail sales, 6% from shipping income and 1% from bulk sales. In addition, sales included a (2%) loyalty program impact as loyalty program customers generate loyalty points that may be used when purchasingBalanced Health products.
Cost of Sales
U.S. Cannabis cost of sales for the three months endedSeptember 30, 2022 were$1,612 . Cost of sales can be primarily attributed directly to e-commerce and retail cost of sales with all other costs of sales are categorized within other manufacturing costs including expenses such as warehouse expenses, freight and shipping supplies. Gross Margin
Selling, General and Administrative Expenses
U.S. Cannabis selling general and administrative expenses for the three months endedSeptember 30, 2022 was$3,655 or 71% of sales. As theU.S. Cannabis business derives a substantial number of sales through its online technology platforms, the primary expense categories within selling, general and administrative include sales and marketing, merchant fees, e-commerce support, IT services, research and development and customer service.Balanced Health focused efforts in Q3 2022 to reduce selling, general and administrative expenses through headcount reduction, contract renegotiation and more efficient marketing and brand spend in order to reduce overhead in future periods
Net Loss
Adjusted EBITDA
Nine Months Ended
Sales
U.S. Cannabis sales for the nine months endedSeptember 30, 2022 were$17,971 . Over 99% of sales were generated inthe United States and gross sales were composed of 79% from e-commerce sales, 14% from retail sales, 5% from shipping income and 1% from bulk sales. In addition, sales included a 1% loyalty program impact as loyalty program customers generate loyalty points that may be used when purchasingBalanced Health products.Balanced Health continues to identify opportunistic and resourceful strategies and tactics to drive topline sales.Balanced Health's revenues are experiencing signs of stabilization as new customer acquisition costs that increased in the first half of 2022 are slowly coming down in the third quarter.Balanced Health increased discounts for their e-commerce subscription program to retain and attract customers utilizing their CBDistillery website and drive additional sales of their products. In addition,Balanced Health successfully launched its Synergy+ product line inMay 2022 , which we believe has been its best product launch since inception and will drive higher sales for its loyal customer base and attract new customers to its cannabinoid products.
Cost of Sales
U.S. Cannabis cost of sales for the nine months endedSeptember 30, 2022 were$5,899 . Cost of sales can be primarily attributed directly to e-commerce and retail cost of sales with all other costs of sales are categorized within other manufacturing costs including expenses such as warehouse expenses, freight and shipping supplies.Balanced Health implemented efficiencies throughout the year to reduce cost of sales, particularly freight savings from alternative providers, headcount reduction, lower packaging costs, renegotiating with co-manufacturers and internalizing production of specific products.
Gross Margin
Selling, General and Administrative Expenses
U.S. Cannabis selling general and administrative expenses for the nine months endedSeptember 30, 2022 was$12,213 or 68% of sales. As theU.S. Cannabis business derives a substantial number of sales through its online technology platforms, the primary 28 --------------------------------------------------------------------------------
expense categories within selling, general and administrative include sales and marketing, merchant fees, e-commerce support, IT services, research and development and customer service.
Share-based Compensation
Write-off of Joint Venture Loan
The write-off of joint venture loan for the nine months endedSeptember 30, 2022 of ($592 ) was due to the write down of VF Hemp inventory during the second quarter which subsequently led to the Company writing off its remaining loan balance to VF Hemp. Impairments The impairments on our goodwill and intangible assets for the nine months endedSeptember 30, 2022 was ($29,799 ). The Company considered qualitative factors in assessing impairment indicators and concluded atJune 30, 2022 , an impairment trigger existed. The impact to goodwill of ($25,169 ) and intangible assets of ($4,630 ) were triggered by inflationary effects on consumer spending, decreases in market capitalization of CBD companies and the continued federal regulation lack of clarity with respect to CBD. We evaluated forecasts of ourU.S. Cannabis business segment and a reduction in market transaction multiples for CBD companies in our valuation and impairment conclusions. Subsequent toJune 30, 2022 , the Company has not identified any additional impairment triggers. See Part 1, Item 1 Note 6 "Goodwill and Intangible Assets" for additional details.
Loss from Equity Method Investments
The loss from equity method investments for the nine months endedSeptember 30, 2022 of ($2,667 ) was due to losses from VF Hemp and consisted primarily of the write down of VF Hemp inventory during the second quarter. VF Hemp is not currently cultivating hemp as we await FDA clarity on the use of CBD.
Net Loss
Adjusted EBITDA
U.S. Cannabis adjusted EBITDA was ($43 ) primarily due to the VF Hemp year-to-date losses partially offset by positive adjusted EBITDA fromBalanced Health for the nine months endedSeptember 30, 2022 . See the reconciliation of Adjusted EBITDA to net income in "Non-GAAP Measures-Reconciliation of Net Earnings to Adjusted EBITDA".
Liquidity and Capital Resources
Capital Resources
As atSeptember 30, 2022 , we had$23,165 in cash (includes$5,000 in restricted cash) and$64,418 of working capital, and as atDecember 31, 2021 , we had$58,667 in cash (includes$5,250 in restricted cash) and$110,646 of working capital. We believe that our existing cash together with cash generated from our operating activities, proceeds from our Credit Facilities and Pure Sunfarms Loans (as defined below), and proceeds from our at-the-market equity offering program (as described below), will provide us with sufficient liquidity to meet our working capital needs, repayments of long-term debt, future contractual obligations and planned capital expenditures for the next 12 months. In addition, we may obtain additional liquidity from potential equity or debt financings in the future. We intend to use our cash on hand for daily funding requirements. (in thousands of U.S. dollars unless otherwise Outstanding noted) Maximum September 30, 2022 Operating Loan (1)C$ 10,000 $ 7,650 FCC Term Loan $ 25,258 $ 25,258 Pure Sunfarms LoansC$ 54,906 C$ 44,651 1.
The Operating Loan was amended on
The Company's borrowings under the FCC Term Loan, the Operating Loan and the VFCE Loan (as defined below) (collectively the "Credit Facilities") are subject to certain positive and negative covenants, including debt ratios, and the Company is required to maintain certain minimum working capital. As ofSeptember 30, 2022 , the Company was in compliance with all of its covenants under its Credit Facilities. OnDecember 31, 2021 we were not in compliance with one financial covenant under our FCC Term Loan. Subsequent toDecember 31, 2021 , we received a waiver fromFarm Credit Canada ("FCC") in connection with the 29 -------------------------------------------------------------------------------- annual testing onDecember 31, 2021 for the one financial covenant. FCC measures our financial covenants once a year on the last calendar day of the year and our next annual testing date will be onDecember 31, 2022 . We can provide no assurance that we will be in compliance or receive a waiver for any non-compliance as of the next annual testing date. Accrued interest payable on the Credit Facilities and Pure Sunfarms Loans as ofSeptember 30, 2022 andDecember 31, 2021 was$326 and$304 , respectively, and these amounts are included in accrued liabilities in the Consolidated Statements of Financial Position. FCC Term Loan The Company has a term loan financing agreement withFarm Credit Canada , a Canadian creditor (the "FCC Term Loan"). The non-revolving variable rate term loan has a maturity date ofApril 1, 2025 and a balance of$25,258 onSeptember 30, 2022 and$26,723 onDecember 31, 2021 . The outstanding balance is repayable by way of monthly installments of principal and interest, with the balance and any accrued interest to be paid in full onApril 1, 2025 . EffectiveAugust 1, 2020 , monthly principal payments were reduced to$164 from$257 . As ofSeptember 30, 2022 , borrowings under the FCC Term Loan agreement were subject to an interest rate of 3.746% per annum. As collateral for the FCC Term Loan, the Company has provided promissory notes, a first mortgage on the VFF-ownedDelta 1 andTexas greenhouse facilities, and general security agreements over its assets. In addition, the Company has provided full recourse guarantees and has granted security interests in respect of the FCC Term Loan. The carrying value of the assets and securities pledged as collateral as ofSeptember 30, 2022 andDecember 31, 2021 was$214,053 and$233,187 , respectively.
Operating Loan
The Company has a revolving line of credit agreement with a Canadian chartered bank (the "Operating Loan"). The Operating Loan has a line of credit of up toC$10,000 , as amended onMay 7, 2021 , less an outstanding letter of credit ofC$38 and includes variable interest rates with a maturity date ofMay 7, 2024 . The Operating Loan is subject to margin requirements stipulated by the lender. The Operating Loan had a balance of$4,000 onSeptember 30, 2022 and there was no amount drawn on this loan onDecember 31, 2021 . As collateral for the Operating Loan, the Company has provided promissory notes and a first priority security interest over its accounts receivable and inventory. In addition, the Company has granted full recourse guarantees and security therein. The carrying value of the assets pledged as collateral as ofSeptember 30, 2022 andDecember 31, 2021 was$35,421 and$34,741 , respectively.
VFCE Loan
VFCE had a loan agreement with a Canadian chartered bank that includes a non-revolving fixed rate loan (the "VFCE Loan") ofC$3,000 with a maturity date ofJune 2023 and a fixed interest rate of 4.98% per annum. The Company paid off the outstanding balance of the VFCE Loan in the first quarter of 2022. As ofSeptember 30, 2022 andDecember 31, 2021 , the balance of the VFCE Loan was nil andC$624 , respectively. Pure Sunfarms Loans OnMarch 15, 2021 , Pure Sunfarms entered into the Third Amended and Restated Credit Agreement (the "Third Amended and Restated PSF Credit Agreement") with FCC and two Canadian chartered banks, which extended the maturity date of each of the PSF Revolving Line of Credit, PSF Non-Revolving Facility and the PSF Term Loan (each as defined below) throughFebruary 7, 2024 and included a guarantee byVillage Farms . The Third Amended and Restated PSF Credit Agreement amended and updated the previous three loan facilities. The first loan facility under the Third Amended and Restated PSF Credit Agreement is a revolving line of credit (the "PSF Revolving Line of Credit") with two separateC$7,500 commitments from each of the Canadian chartered banks. Each lender established a revolving line of credit severally and not jointly whereby Pure Sunfarms may receive advances in equal proportionate amounts from each lender. The advances shall be used for working capital purposes, general corporate purposes and capital expenditures, of which capital expenditures may not exceedC$7,500 in aggregate use of the outstanding advances. Interest is payable at the Canadian prime rate plus an applicable margin per annum, payable monthly. The PSF Revolving Line of Credit had an outstanding balance ofC$4,745 as ofSeptember 30, 2022 andC$9,855 as ofDecember 31, 2021 . Pure Sunfarms had an outstanding letter of credit issued to BC Hydro against the revolving line of credit ofC$5,145 atSeptember 30, 2022 andDecember 31, 2021 . The second loan facility under the Third Amended and Restated PSF Credit Agreement is a credit facility with a Canadian chartered bank, as agent and lead lender, and FCC, as lender, in respect of aC$17,000 secured non-revolver term loan (the "PSF Non-Revolving Facility"). The PSF Non-Revolving Facility, which matures onFebruary 7, 2024 , is secured by theDelta 2 andDelta 3 greenhouse facilities and contains customary financial and restrictive covenants. The purpose of the PSF Non-Revolving Facility is to refinance ourDelta 3 greenhouse and provide funds to upgrade and retrofit theDelta 2 facility. The outstanding amount on the PSF Non-Revolving Facility wasC$13,500 onSeptember 30, 2022 andC$15,076 onDecember 31, 2021 . 30 -------------------------------------------------------------------------------- The third loan facility under the Third Amended and Restated PSF Credit Agreement is aC$25,000 term loan (the "PSF Term Loan") at the Canadian prime interest rate plus an applicable margin, repayable in quarterly payments equal to 2.50% of the outstanding principal amount startingJune 30, 2021 and maturingFebruary 7, 2024 . Advances under the PSF Term Loan are required to be used to finance the upgrade and retrofit of theDelta 2 greenhouse to render it suitable for cannabis cultivation as well as any funds necessary for capital expenditures on theDelta 3 processing facility. The outstanding amount on the PSF Term Loan wasC$20,625 onSeptember 30, 2022 andC$22,614 onDecember 31, 2021 . OnDecember 20, 2020 , Pure Sunfarms entered into aC$6,250 non-revolving demand loan at the Canadian prime interest rate plus 3.75% per annum with a Canadian chartered bank with the financial support of theBusiness Development Bank of Canada (the "BDC Facility"). The BDC Facility, provided as part of COVID-19 government relief, requires interest only payments monthly for the first twelve months and matures onDecember 31, 2031 . Commencing onDecember 31, 2021 , Pure Sunfarms will repay the outstanding principal amount in equal monthly installments. The outstanding amount on the BDC Facility wasC$5,781 onSeptember 30, 2022 andC$6,282 onDecember 31, 2021 . Pure Sunfarms is required to comply with financial covenants under the Third Amended and Restated PSF Credit Agreement, which are measured quarterly. As ofSeptember 30, 2022 , Pure Sunfarms was in compliance with these financial covenants.
Emerald Promissory Note
The Company had a note payable due to Emerald ofC$19,900 , plus accrued interest that the Company originally issued to Emerald as partial consideration for theNovember 2, 2020 acquisition of Pure Sunfarms. The note and accrued interest were repaid to Emerald in full onFebruary 8, 2021 .
Equity Offerings
OnAugust 9, 2022 ,Village Farms entered into a Controlled Equity Offering Sales Agreement ("Sales Agreement") pursuant to which the Company may offer and sell Common Shares having an aggregate offering price up to$50 million from time to time to or throughCantor Fitzgerald & Co. and A.G.P./Alliance Global Partners . Under the Sales Agreement, the Company may offer and sell Common Shares throughCantor Fitzgerald & Co. and A.G.P./Alliance Global Partners by any method deemed to be an "at the market offering" as defined in Rule 415 of the Securities Act of 1933, as amended, including sales made directly on The Nasdaq Capital Market. As ofSeptember 30, 2022 , the Company had issued and sold 450,456 Common Shares under the Sales Agreement, resulting in net proceeds of$1,109 thousand after deducting commissions and offering expenses. Of these proceeds,$824 thousand were received prior toSeptember 30, 2022 . In addition, fromSeptember 30, 2022 toOctober 31, 2022 , the Company had issued and sold 1,693,444 Common Shares under the Sales Agreement, resulting in net proceeds of$3,482 thousand after deducting commissions and offering expenses. Of these proceeds,$3,267 thousand were received on or prior toOctober 31, 2022 . As ofOctober 31, 2022 ,$45,267 thousand remained available for sale under the Sales Agreement. OnJanuary 20, 2021 ,Village Farms completed a registered direct offering for the purchase and sale of an aggregate of 10,887,097 Common Shares at a purchase price of$12.40 per Common Share for gross proceeds of approximately$135,000 .
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