10-K: Village Farms International Reports Increased Sales but Faces Challenges in 2024

Village Farms International reports increased sales driven by Canadian cannabis and fresh produce segments, but faces challenges including material weaknesses in internal controls and market pressures.

Summary

• Village Farms International's sales increased by 18% to $336.2 million in 2024, driven by growth in the Canadian cannabis and fresh produce segments.
• The company experienced a decrease in gross margin due to a non-cash inventory impairment in the Canadian cannabis segment and lower margins in the U.S. cannabis segment.
• Village Farms reported a net loss of $35.9 million attributable to Village Farms International, Inc. shareholders.
• The company identified material weaknesses in its internal controls over financial reporting related to information technology and journal entries.
• Village Farms is working on remediation plans to address these weaknesses.
• The company's Canadian cannabis business saw increased sales, driven by branded sales, non-branded sales, and international sales.
• The U.S. cannabis business experienced a decrease in sales due to new restrictions on CBD sales and competition from unregulated hemp-derived products.
• The fresh produce segment saw increased sales and improved gross margin due to higher volumes and prices.
• The company's energy segment, VF Clean Energy, began operations in 2024 and contributed incremental profit.
• Leli Holland, the company's Dutch cannabis operation, completed its first harvest and began sales in the first quarter of 2025.

Sentiment

Score: 5

Explanation: The document presents a mixed sentiment. While sales increased, the company faces challenges including net losses, material weaknesses in internal controls, and market pressures. The future outlook is uncertain, with potential for growth but also significant risks.

Positives

• Sales increased by 18% to $336.2 million in 2024.
• Canadian cannabis sales increased by 31% to $148.9 million.
• Fresh produce sales increased by 12% to $169.2 million.
• The Delta, British Columbia Renewable Natural Gas Project began operations in April 2024 and contributed incremental profit.
• International medicinal sales in 2024 increased to $10.9 million.

Negatives

• The company reported a net loss of $35.9 million attributable to Village Farms International, Inc. shareholders.
• The company identified material weaknesses in its internal controls over financial reporting related to information technology and journal entries.
• The U.S. cannabis business experienced a decrease in sales due to new restrictions on CBD sales and competition from unregulated hemp-derived products.
• Gross margin decreased due to a non-cash inventory impairment in the Canadian cannabis segment and lower margins in the U.S. cannabis segment.

Risks

• The company may be unable to regain profitability or achieve future growth.
• The company is dependent on the success of its Canadian cannabis business, which has a limited operating history in the cannabis industry.
• The company faces risks inherent in an agricultural business, such as weather, insects, and plant diseases.
• The company faces significant competition in the cannabis industry.
• The company cannot predict when, if ever, cannabis will be federally legal in the United States.
• The company's common shares may be delisted from the Nasdaq Capital Market if it does not regain compliance with the minimum bid price requirements by April 16, 2025.
• The company faces risks related to cyber security attacks and other incidents.
• Inflation may continue to rise and increase the company's operating costs.

Future Outlook

The company expects international expansion to enhance profitability while expanding its brand and experience into emerging new legal cannabis markets. The company also expects to continue to improve its Texas greenhouse operations and implement new cultivation technologies. Health Canada expects to publish final regulatory amendments in Spring 2025.

Management Comments

• Management intends to time the expansion and completion of the east half of the Delta 2 facility when market demand is sufficient to absorb supply profitability.
• Management believes that Pure Sunfarms is the leading low-cost, high-quality producer in the Canadian market and its low-cost structure, primarily driven by economies of scale and large-scale greenhouse experience, is sustainable and provides a competitive industry advantage.

Industry Context

The report highlights the competitive nature of the cannabis and produce industries, including the impact of oversupply, pricing pressures, and regulatory changes. It also notes the increasing legalization of cannabis and the rapid growth and consolidation in the cannabis and CBD industries.

Comparison to Industry Standards

• Pure Sunfarms is compared to other Canadian cannabis producers, highlighting its low-cost production and market share.
• The report mentions the impact of Mexican greenhouse production on produce pricing, noting Mexico's wage advantage versus the U.S.
• Balanced Health Botanicals is compared to other companies awarded U.S. Hemp Authority Certification.

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 approximately $ 165 , $ 118 and $ 115 in salary and benefits during the years ended December 31, 2024, 2023 and 2022, respectively.
• On May 29, 2024, 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 for a total cash purchase price of approximately $ 3,016 .

Stakeholder Impact

• Shareholders may experience dilution due to future issuances of common shares.
• Employees may be affected by changes in labor availability and potential unionization efforts.
• Customers may be impacted by changes in product pricing and availability.
• Suppliers may be affected by changes in the company's sourcing strategies.

Next Steps

• The company is working on remediation plans to address the material weaknesses in its internal controls.
• The company is continuing to work to ensure a fair and transparent process and remains a strong proponent of Schedule III.
• The company has an ongoing sale process for its Monahans (Permian Basin, Texas) greenhouse facility.

Key Dates