Village Farms International, Inc. (VFF) Q1 2019 Earnings Call Transcript

Village Farms International, Inc. (VFF 6.69%)
Q1 2019 Earnings Call
May 10, 2019, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to Village Farms' international first quarter 2019 financial results conference call. Yesterday, Village Farms issued a news release reporting its financial results for the first quarter ended March 31st, 2019. That news release along with the company's financial statements are available on SEDAR and on the company's website at villagefarms.com under the Investors heading. Please note that today's call is being broadcast live over the internet and will be archived for replay both by telephone and via the internet beginning approximately one hour following completion of the call. Details of how to access the replay are available in yesterday's news release. Before we begin, let me remind you that forward-looking statements may be made today during or after the formal part of this conference call. Certain material assumptions are applied in providing these statements, many of which are beyond our control.

These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward-looking statements. A summary of these underlying assumptions, risks, and uncertainties is contained in our various security filings including Village Farms' current annual information form for the year ending December 31st, 2018 and MD&A for the quarter ending March 31st, 2019 which are available on SEDAR. These forward-looking statements are made as of today's date and except as required by applicable securities of law, we undertake no obligation to publicly update or revise such statements. I would now like to turn the call over to Michael DeGiglio, Chief Executive Officer of Village Farms International. Please go ahead.

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Thanks, Marcella. And thank you to everyone joining us, both by telephone and the internet today. With me for today's call is Village Farms' chief financial officer, Stephen Ruffini. The agenda for today's call is first, update on the significant progress on both our Canadian cannabis joint venture, Pure Sunfarms, and our US hemp/CBD program led by our outdoor program through Village Fields Hemp. Steve will review the first quarter financials. I'll return with some closing thoughts and then open to Q&A. So, with that, we feel -- here, management feels we're off to a good start for 2019. But before I begin, I wanna take a moment to provide our perspective on the false and misleading claims that were made publicly about our company a number of weeks back. I wanna be clear that as a public company, we fundamentally believe in the right for legitimate contrarian views of our company or any company, for that matter.

And we acknowledge that legitimate short-sellers have a play and play a valuable role in the markets. But we despise parasites who engage in outright lies, distortions of the truth, partial and misleading information, and innuendo to manipulate the market for short-term, entirely self-serving purposes. This kind of activity provides zero value to the marketplace and especially hurts individual shareholders of all sizes, whereas we know the real culprits here aren't even the public persona. But as we say in Texas, these yellow-bellied cowards hiding anonymously in the weeds caused this issue. So, unfortunately, it's allowed to happen. And as a company with strong share price, a successful listing on NASDAQ, strong trading volumes, and a quiet period at the time as a result of our financing, we're an ideal candidate for this type of manipulation.

We recognize that many of our shareholders wanted us to respond loud and strong and publicly. We have taken your comments, and, with that, we do appreciate your input. However, we also heard from many others, including our advisors and others in the industry who advised us clearly to push past the distraction, turn off the quote feeds, and focus our time and energy on continuing to execute on our multiple significant business opportunities. So, we chose the latter. And two days later, we closed a $20 million financing with no sweeteners, straight up equity, at $20.00 a share. There'll always be opinions in the capital markets. But what will always trump opinion is the undeniable business execution on financial results of both companies who are being targeted. At the end of the day, we are confident that our shareholders will do their own due diligence -- we encourage and welcome it -- and that they will make up their own mind to the best accordingly.

The success of our company will ultimately be judged by our ability to execute on our business opportunities and deliver in growth and earnings and the integrity that we all have here in Village Farms that we've had for 30 years. We are a very transparent, honest, and a company filled with integrity at every level. And we're very proud of that. So, with that said, that's a great segue, moving forward to our financial results. So, as I mentioned, we are very pleased to, once again this quarter, report positive net income from Pure Sunfarms, the second consecutive quarter of profitability. And with net income increasing substantially to $8.6 million from $5.5 million in Q4, that contributed to positive net income to Village Farms overall of $7.6 million or $0.16 a share after tax. Pure Sunfarms' sales in Canadian dollars tripled sequentially to $14.4 million or $10.8 million in US dollars. And EBITDA was $4.3 million Canadian or $6.4 million US for an EBITDA margin of 59%, up meaningfully from 48% in Q4.

And just a quick note that we had a few questions around our JV partner pre-releasing Pure Sunfarms revenue number on May 1st. And I just wanna say that it is our current policy here at Village Farms not to report preliminary numbers. So, with respect to our numbers, its' worth noting that Pure Sunfarms achieved these results with Delta 3 still very much in early ramp-up mode. Only quadrant 2 which is about a quarter of the one million square feet was harvesting throughout the entire quarter. Half of quadrant 3 was only licensed at the end of January and planted out in February and had no harvest in the first quarter. And quadrant 4, the final one, was only licensed mid-March by Health Canada and was brought in production in April this quarter. And quadrant 1 was also brought back into production in early April after being offline for several months with the installation of lighting. And those several months were during that first quarter.

So, we're really proud of the results based on just 25% of the operation and harvesting. Having overseen the start-up of numerous large-scale greenhouse operations for 30-plus years, I can tell you that this is a significant achievement to be posting these types of numbers at this point in the ramp-up to the operations. The performance makes Pure Sunfarms stand out in the Canadian license produce of landscape despite most others having a significant head start, in many cases, years ahead, and having spent tens or even hundreds of millions of dollars more to start up their operations. I have said this many times before, but it bears repeating now, especially that Pure Sunfarms has exercised its option on the second delta facility, Delta 2, which is approved on a back of success with Delta 3 and the strength of the outstanding team that's been put together at Pure Sunfarms.

Converting an existing greenhouse with the additional benefit of experience and know-how in developing and ramping up large-scale operations, the largest in North America, that Village Farms brings to the table has a significant advantage. As I have said before, lower capital cost to convert. And as a reminder, we were able to secure 24 megawatts of power for each of the Delta 3 and 2 facilities directly from the utility without spending nearly $2 million of megawatt for cogeneration. That's a huge capital cost savings versus competitors who have to put cogen in. Secondly, the speed of conversion is much quicker than building a brownfield site, new development. Seven-hundred-fifty years of combined grow experience, I've talked to that many times. The experienced skill force are ready in place. That's been on a site 20 years. That, by far, No. 1 in achieving these type of goals. Years of chronological data that our grow team can base it on.

So, we're seeing the benefit at Pure Sunfarms. And hopefully, we will be provided with the opportunity to demonstrate this same level of execution in Texas with hemp. Two months ago, since our last call, numerous additional harvests have been completed. I am pleased to report the facility continues to perform well, meeting our expectations. Yield and quality are continuing to meet or exceed expectations. Demand for product revenues product remains strong. Wholesale pricing remains buoyant. And Pure Sunfarms is taking full advantage, selling essentially everything it's producing to drive near-term cash flows. As per plan, last month, Delta 3 facility was fully planted out, as I mentioned. And we are now growing on the entire one million square feet of growing area. The Delta 3 facility will very shortly be operating at its projected annual production of 75,000 kilograms on a run rate basis when we start harvesting quadrant 1 and 4 this summer.

I wanna take this opportunity to provide some content throughout projected production numbers of 75,000 kilograms annually from our 1.1 million square foot facility. We have had a lot of questions and some criticism around this number, as many believe even most of our purest are projecting higher yields per square foot. Our projections are admittedly conservative. But we have three decades as a large-scale grower. We feel we have an advantage in our perspective. It takes time to wrap up a new growing operation, even one with inherent advantages, I discussed a moment ago. It's a process that cannot be cut short. And ultimately, it's farming subject to a number of different factors out of our control, temperature, sunlight. It's not about what goes right. It's about what doesn't go the way you had hoped and how quickly a team evaluates and finds a solution and then implements a strategy to correct it. So, we believe providing conservative production numbers as we ramp up is a prudent way to go.

That said, I have no doubt that when Pure Sunfarms and all of this appears, we'll be realizing yields at a minimum or on par with the industry average. And again, I think we are being conservative. So, Pure Sunfarms on the extraction front, continuing to move our extraction plans forward. Very much still on track to have in-house extraction operations in place by year-end this year and scalable to cover both Delta 3 and 2 or over two million square feet. Oils and derivative products will be party over on product strategy. And to the extent that we need to be ahead of having our own capabilities in place, we will use third-party extract in short term. And we're having those discussions right now. We're very comfortable with the progress and the path forward. As I said in the past, we take a imperial approach, initially. And that's get the operation converted, build on the foundation, put together a great corporation and team, get through the production wrap up, post-harvest, and now the process to move forward to extraction.

So, with the Delta 2, we announced that a few weeks back, the next greenhouse, another million square feet with the unmitigated success of Delta 3 and the confidence level that the entire team has to date, including the board. Converging licensing production ramp-up and quality of the product. We were thrilled that we exercised the option jointly with our partner on Village Farms' additional Delta 2 facility which is nearly identical to Delta 3 and adjacent to it. At a minimum, doubles Pure Sunfarms projected annual production to 150,000 kilograms of cannabis is a conservative number. Expect benefit from the learnings around Delta 3. As a reminder, Village Farms contributed the Delta 2 facility. And our JV partner is contributing $25 million toward the estimated $60 million conversion cost, with the remainder to be funded through Pure Sunfarms own cash flow and the recent $20 million credit facility with Bank of Montreal and Foreign Credit Canada.

Timeline. Beginning the conversion of external areas this summer and the conversion of the internal growing area in the fall. Expecting first harvest mid next year and the full run rate annual production in Q4 next year. Yesterday, as many of you know, Health Canada announced a revised licensing application process for licensed producers. We understand it may require new applicants to build out their facilities and entirely before submitting their application. We have some uncertainty. And we're investigating what that exactly means right now. But it could be easing up Health Canada's workload. And clearly, there are many applicants that have no intention of going forward due to lack of capital or assets. So, that could be a positive I think for the industry. Regarding our product branding and strategy, a significant process has been made. We've continued to build a superior branding team, now well-advanced. And we expect to brand launch the Pure Sunfarms brand.

The management team at Pure Sunfarms will be launching that by the end of this quarter. Packaging and processing license also continue to be expected before the end of this quarter. We know that Ontario is very impressed with our operation and our product and is very eager to get our product into that system. And we expect to begin shipping very quickly after the licenses are in place as well as adding other provincial buyers who are waiting. So, I think in the third and fourth quarter, we'll see that coming to fruition. So, I can assure you that the process is moving forward. And we continue to plan around receiving the licenses in Q2 I mentioned. So, let's move to the US. Very quickly, moving forward with our US hemp/CBD initiative. Opportunity to be an early mover in the space. Some background there. We realize that even with a number of states passing legislation currently going on -- in fact, as I mentioned, the governor of Georgia signed it into law this morning for Georgia.

We realize that by the time the USDA has all the regulatory processes that even the states that are permitted now will not be able to produce this year in 2019 outdoors. So, we focused on the 2014 farm bill states. And there was a great move, I think, by our partners in doing so. So, kudos to those guys who had the vision to see that. So, as a reminder, in December, the 2000 farm bill was passed, legalizing hemp, the CBD level at the federal level. And we issued a press release that next day moving forward aggressively in the space. And the sector has a conservative projection to that $16 billion market. How it goes, will be vertically integrated, consumer packaged goods company. That's our focus going forward, growing, extracting, producing our own products for the retail space. And many of those are existing customers we imported before.

And it's an expanding consumer space through many channels. Moving first as an outdoor, for our Village Fields Hemp 65% joint venture we formed in March of this year with the Jennings Group. Very experienced in hemp. Since our last call, I'm pleased to report that we have started germination preparation for planting on more than 800 acres in three states. We're evaluating opportunities for additional acreage. We'll depend to some extent on regulatory developments. And as I just mentioned, this morning, the governor of Georgia where Village Fields Hemp is headquartered and where we expect to locate our first large extraction operation signed that state's hemp bill permitting cultivation. In anticipation of beginning to grow this spring, last fall, we secured more than $2 million worth of seed which is in short supply which will be more than adequate to address our plan for this year. The timeline is we already started germination for all 800 acres last week.

Transplanting the field in the next two to three weeks. All acres should be planted by mid-June. Planting five different varieties with seed, all with good genetics from a very strong breeder. Start harvesting this summer. We'll initially sell biomass as we get extraction operations in place, evaluating settle site with locations in Georgia and targeting extraction by Q4 into Q1. Begin CBD oil on a wholesale basis next year. And transition into production of branded and white-label CBD products to existing national customers and new channels going into mid- to late-2020. Aspirations for a parallel greenhouse program to leverage out just in the large-scale operations in Texas. Let's talk about that. In March, Texas used scheduled hemp as a control substance, bringing its status in line with that which is federally legal but can't grow until Texas passes law to create a hemp program which would provide the regulatory framework for the cultivation and processing of hemp and production of hemp-derived CBD products.

Hemp, though, was passed by Texas house with a unanimous vote. And it's now on the way to the Senate. Strong supporter of the hemp bill that we are, we are encouraged by the progress to date that's being made. I'd now like to turn the call over to Steve who will walk through the financial remarks. Steve?

Stephen Ruffini -- Chief Financial Officer, Executive Vice President, Company Secretary & Director

Thanks, Mike. I'll make a few highlights. And then we'll open it up to Q&A. So, one of the items that is different this quarter is the gain and disposal of assets. I've had questions on that already. That is simply a reflection of the $25 million of Pure Sunfarms stock that we received in exchange for the contribution of the Delta 2 asset which obviously have a book value of substantially less than the $25 million of value. So, the $13,500,000.00 gain on our income statements is simply a reflection of the fair market value of over and above the book value of our assets. The remaining assets on our books -- 210 acres are on our books for $70 million. So, they're clearly worth substantially more than the $70 million. And that is not the first time. We also recognized a gain on disposable income when we contributed the Delta 2 asset. So, if Delta 1 were ever to be optioned -- which is the largest greenhouse in North America -- you would see a substantive gain on disposal of assets in that quarter as well.

As stated in other calls, for Pure Sunfarms, we're not gonna give specifics on Pure Sunfarms grams sold, grown, program figures. We will, like we have for Village Farms for years, give directions and add some color. Again, as Mike said, this is an agricultural business. And managing and reporting numbers quarter to quarter is not the way we manage the business. And I don't think it's a good way of analyzing the business. So, the gross margins of Pure Sunfarms in quarter 1 was 65%. The full Pure Sunfarms financials are contained in footnote seven of the Village Farms financials in Canadian dollars. They're there for everyone to see. The 65% gross margin was very much in line with the gross margin in the fourth quarter which was 68%. So, very consistent. In March, you heard us say that the 2018 cost per gram was roughly a dollar.

We also said that due to seasonal and operational cost involving lights -- in our case, cogens -- in this first quarter of this year, we expected higher costs than a dollar per gram which was, in fact, the case. Roughly one-third of the Pure Sunfarms Q1 cost of sales were due to seasonal factors which will not be incurred in Q2 and Q3. So, since the gross margin was at 65% compared to the prior 68% which is essentially flat quarter-on-quarter, that obviously means with the higher cost per gram that our revenues per gram also increased on a quarter-on-quarter basis. The increase in the revenue program is a reflection of ever-improving quality. As Mike said, it's a ramp-up operation, particularly in the post-harvest operation of Pure Sunfarms. Again, the full notes on the financials are in note seven. I also want to call out on note seven the increase in bio asset on the balance sheet March 31st was $18.2 million compared to the opening balance, January 1st is $7.4 million.

So, that's a strong leading indicator that the gross margins for Pure Sunfarms will be subsequently higher in Q2 than it was in Q1. On the produce business, as reflected in our press release, it was a tough quarter. As reflected, as I've just said, on our cost per gram on Pure Sunfarms, it's the same in our produce business. We don't get into cost per pound. That is how we track our cost internally. Due to production issues at our Texas asset in the winter, we did have some cost issues. So, the fixed cost, essentially, when we pull a portion of the crop or we have lower yield does drive up our cost of production which is reflected in our cost of sales in the first quarter. We are keenly aware of the production issues. They have been addressed. There will be a little bit of carry-over on some of the more expensive Texas towns in the beginning of the second quarter.

But the second crop in Texas, as well as Canadian crop, look good. And we expect improvements in our produce margins in the second quarter and as the year progresses. With respect to adding a little color to Village Fields Hemp, had a high level. We've disclosed 800 acres for the year. You will hear in the industry estimates of production between 1,000 all the way up to 2,500 pounds. We're Village Farms. So, we're gonna be conservative. So, we're gonna use 1,000 pounds per acre. So, that's roughly 800 pounds in biomass, as Mike said. Some of that will be sold direct to third-party extractions as biomass. And some will be retained for our own extraction which won't be up and running until late 2019 into 2020. So, in that regard, if you use the benchmark of $4.00 a pound of biomass and 800,000 pounds, a full $32 million of revenue will not be realized all in 2019. Some of that will carry into 2020. And that will be a decision made by Village Fields Hemp based on our own extractions.

As Mike had said, we're all about cash flow. So, we would certainly sell enough of our own biomass into the market to certainly cover our cash flow needs for this crop as well as for some of our extraction costs. And then we'll retain some of that for yourself to launch our own extraction which has substantially higher margins. But we are projecting that cost per pound for field hemp of roughly $10.00 a pound in the field. So, with that, I'll turn it back over to Mike.

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Thanks, Steve. Just continuing just as an outlook, moving forward, we're very pleased with Pure Sunfarms' opportunities unfolding in this fast first quarter. And clearly, halfway through the second quarter, I can tell you as well. We are feeling very confident. One of the few Canadian license producers that is profitable. And even more impressive, given that Pure Sunfarms has been able to achieve this well in advance of reaching full production and with significant room to lower production cost. Unlike many of our peers, we are very focused on near-term cash flow and profitability, building an institutional track of business with key fundamentals at home before casting our lines all around the world with what we're doing. At some point, you just can't be the biggest. And you can't be everything in this stage for every consumer. Our focus is to continue to grow but be much more focused and get it right on what we're doing before we move onto something new.

This has been a guiding principle from Pure Sunfarms Delta 3 operation from day one. And it will be for Delta 2. And that's part of building a very strong foundation on granite. And it will be for the CBD business in the US. Pure Sunfarms is well-positioned for sales and earnings growth throughout 2019. Very excited about the packaging of processing license which will get a green light this quarter and starting to sell retail all coming together over the next few months. Equally ramping up production on a full run rate starting with the third quarter toward 75,000 kilos. We haven't even been in the space 24 months. So, it's a real credit to the whole team, including the Pure Sunfarms new management team that have taken the baton and done extremely well. Not even 24 months. And we're very pleased with how quick we're moving and the deliverables as well. So, commence conversion of Delta 2. That's expected. Now we're already in the planning and procurement phase.

And we've learned a lot on the Delta 3 conversion. So, it should go fast and smooth and, perhaps even, at a lower cost. Option on the Delta 1 facility. We regularly get questions about the economic sense of adding another 2.6 million square feet or another 180,000 grams. As we had said, just on that one quick converting. Now with the two conversions of 3, if we did Delta 1, we can do a significant amount of Canadian market. But I'm not concerned with that going forward. As we said, our philosophy is that this is farming as far as the cultural side of this business. And you need to be the low-cost producer. So, at the end of the day, it's not just any overcapacity issues. It's who's the low-cost producer and who's gonna get a seat at the table when the music stops. So, we think we're in a great position to keep moving forward. Hemp/CBD outlook parallel outdoor greenhouse opportunities for us.

We did a market segmentation business model where we're breaking out about 85% CBD derived from field and 10% to 15% from controlled environment, hitting different markets. We feel very strong with that. And at a $16 to $20 billion market, there's not enough high-tech greenhouses in the US to even come remotely close to that number. So, cultivation is gonna start planting, as I said, very quickly and with cash flow generations, as Steve mentioned. And we think we're positioned as an early mover for this massive opportunity. Already a supplier to the big box and retailers we think. And we're having discussions with them about their CBD strategies. So, we're excited over the next couple years what that can bring as we transition more to a CBD company under that banner of hemp. Greenhouse, we expect to know very shortly if Texas will put a hemp program in place. It's imminent. Maybe within the next 10 days. And we are ready to move I think as you can see from the US hemp initiative.

We knew how we're secured, where we're gonna be growing. And we secured the seed early on. And I can tell you we're ready to go on the controlled environment side. And one thing to keep in mind is as we -- if the hemp program goes forward in Texas and we convert assets and growing systems as we've done in Canada, those will be the same growing systems whether it's low THC, CBD, hemp varieties or high THC. So, if legislation in the US changes for high THC, we are ready to go in the greatest growing climate anywhere in the continental United States for growing cannabis or hemp. And with a nearly $6 million square foot footprint, we think we can be a major player in the US moving forward. So, it's gonna be a very busy year for us. And we look forward to talking to you in August. Thanks for participating in the call today. And we'll open it up for some Q&A. Operator?

Questions and Answers:

Operator

At this time, I'd like to remind everyone in order to ask a question, please press * and the No. 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Doug Cooper from Beacon Securities. Your line is open.

Doug Cooper -- Beacon Securities Limited -- Analyst

Hi. Good morning, guys. Great results. And let's start with, Steve, the biologic assets. Just wanna be clear. The $18.2 million of biologic assets for PSF at March 31st versus the $7.4 as of December 31st. You were talking directionally, obviously positive. Is there any linear relationship we can draw like it's up 150%? All other things being equal, should that imply that we would anticipate gross profit to be up 150%? Or should we just look at it directionally and quantitative as opposed to a direct linear?

Stephen Ruffini -- Chief Financial Officer, Executive Vice President, Company Secretary & Director

Yeah. It's not a specific linear. It's certainly a strong indicator. It's not necessarily a linear percentage. But it's a strong indicator. The biological asset for Pure Sunfarms is a function of the estimated buds on the plants on March 31st versus December 31st. Obviously, as Michael said, we have more in production on March 31st than -- and we'll even have more as the year progresses. So, it's a strong indication that there's more volume in April than there was in January. And also an indication. The other driver of that could be margin. I've already said that the cost per gram were higher in Q1 due to the seasonal issues of energy use which you will not see in Q2 and Q3. Telling the market that the cost of gram will be substantively lower on a per gram basis in the summer months than it is in the winter months. And again, margins are -- on the revenue side, our prices are very strong.

Doug Cooper -- Beacon Securities Limited -- Analyst

Okay. Just moving on then. Maybe I'll work in the pricing into this. Mike, you said the run rate 75,000kgs in Q3. So, that would imply obviously 18,750kg run rate if it's split equally among the quarters. My back of the envelope would have Q1 around 4,000 kilograms. You indicated that we were at 25% capacity utilization, essentially, in Q1. What percentage utilization would you anticipate in Q2 if Q3 is getting upwards of 100%?

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

We're not changing our projection. So, we're staying on an annual basis this year with the 46% to 50% or so. So, we're just not -- and you can do the math based on one quarter being in first quarter versus all four in the second quarter. But I would leave it up to you, Doug, to do the math because we just wanna stay with original projections and work off of that which, for this year, again, 46%-50%. And then on 75,000 next year. But that run rate on the 12-month basis, starting with the third quarter of 75.

Doug Cooper -- Beacon Securities Limited -- Analyst

Okay. Can you just maybe walk through again on the quadrants? So, Q1, it comes --

[Crosstalk]

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

So, basically, take a million square feet and divide it by four. So, that's the quads. So, quadrant 1 was in production in the fourth quarter. But then we pulled it because we had limited energy. We couldn't light the whole greenhouse. So, rather than waste time when we got the original cultivation license for quadrant 1 and continued to put the lighting in it, we just left it without lighting and did the lights in Q2. So, we turned off Q1 in October-November or so after that last harvest. And then we put Q2 fully lit with rental cogens in production. So, that was fully in production during the first quarter. Then we got Health Canada approve quadrant 3 and -- there's four flower rooms in there, two and two. But that was not -- even though we planted out half of quadrant 3 in the first quarter, we had no harvest until the second quarter, now. So, that was not in production at all. In the fourth quarter, we got approved in April. The fourth quadrant, rather.

And that was planted out in April. And simultaneously, in planting out the fourth quarter, we came back because we had installed the lights in over the winter and planted out the first quarter. So, the beginning of April, half the greenhouse is planted out not in the first quarter. And the third quarter that was planted -- the third quadrant that was planted in the first quarter was planted but no harvest. Does that make sense?

Doug Cooper -- Beacon Securities Limited -- Analyst

Yeah. I think you kept mixing up quarters and quadrants.

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Yeah. I'm sorry about that.

Doug Cooper -- Beacon Securities Limited -- Analyst

Okay. The EBITDA margin is obviously best in class to date among the peer group. Are these sustainable you think? And do we anticipate G&A costs maybe to increase as you get the packaging license and roll out your brand portfolio?

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Yeah. We would like to keep our G&A cost, like a normal operating company, somewhere in the 8% to 12% of sales range. So, obviously, as we wrap up sales, it will go down. But as we put more cost into marketing, packaging will go up. But at that full run rate, we wanna operate it like we operate all our businesses in that level.

Doug Cooper -- Beacon Securities Limited -- Analyst

Right. So, this quarter was 9.2% of sales. So, that's in line with your anticipation?

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Absolutely. And I think we'll see basically, that based on higher volumes and higher sales, it'll go down. But based on spending more money, it'll go up. But that's the variation until we get fully operational on our packaging, marketing distribution while we're ramping up production. So, that's 8% to 12% sweet spot we wanna be in. We're very cash flow oriented and growing. We wanna grow our top line. But we wanna be profitable all the way.

Doug Cooper -- Beacon Securities Limited -- Analyst

Sure. And just to get a final question on the hemp side, you talked 800 acres. And Steve ran through the math. If you're just selling the biomass, I get $32 million of revenue US dollars. You talked about your cost of $10.00. So, that would leave gross profit at $24 million US dollars. You have 65% of the joint venture. That's $15.5 million of incremental gross profit. How much of that would you anticipate? You indicated you might not sell all of it this year and hold some for your own extraction. But how much would you anticipate of that biomass selling in this year, assuming, obviously, there's no issues on the farming side?

Stephen Ruffini -- Chief Financial Officer, Executive Vice President, Company Secretary & Director

Roughly 50%.

Doug Cooper -- Beacon Securities Limited -- Analyst

Fifty. And that would be --

Stephen Ruffini -- Chief Financial Officer, Executive Vice President, Company Secretary & Director

Again, it's what we're currently anticipating based on the timing and execution of our extractions.

Doug Cooper -- Beacon Securities Limited -- Analyst

Okay. And that would be sales -- by the time you harvest and sell the biomass, would that be a Q4 event?

Stephen Ruffini -- Chief Financial Officer, Executive Vice President, Company Secretary & Director

Q3-Q4. Again, it's important to understand the 800 acres are rolling. So, it's not all gonna produce one since it's not one piece of land. It's any number of farms. So, it's a rolling production.

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Different harvest states. Drying is different everywhere. It depends on the humidity levels. So, between harvesting, drying, and the harvesting going on over a 60-70-day period, it's in Q3 and Q4.

Doug Cooper -- Beacon Securities Limited -- Analyst

And how much available land does your partner bring to the table? Eight-hundred acres. How much more could you have with your partner? Not including Texas but just with your partner, how many acres could you have in 2020?

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

We can have five times the amount. It's just that again, with the legislation being passed even in Georgia and the governor signing this morning, you can't cultivate a drug. The commissioner of agriculture in Georgia made it very clear there would be no hemp grown in Georgia this year because every state that's approving it -- and this will be for Texas should they approve it -- is gonna wait for the federal USDA to come down with the regulatory requirements. And they indicated don't expect that any sooner than September. Well, you can't plant out in October outside. You can, but it's very -- you can. And we're looking at that. But it's in a very limited area where you can do that. So, that's why we couldn't use the land we have in Georgia this year.

Doug Cooper -- Beacon Securities Limited -- Analyst

But all those things equally -- presumably, your farmer partners will rip out soybeans or corn or whatever else they're growing into to do this as long as the profitability holds.

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Yeah. I think right now many growers are looking at ripping out soybeans and tobacco and things of that nature because it's a very new industry. And it's tough on a lot of the farmers. They're very excited about growing hemp this year at the margins we're looking at. But that'll change in the [audio cuts out]

Doug Cooper -- Beacon Securities Limited -- Analyst

And my final question. The last conference call, you had talked about the packaging license in the April timeframe. Obviously, that's come and gone. Any visibility on the government? Or it's hard to make any estimates of when the government might come through?

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Well, if you asked me the question yesterday, I'd probably say no. But today, I will say that yeah, we have visibility on it. And we're feeling much more confident it will happen. I should have just said the second quarter because it's hard to predict things out of our control. In this case, Health Canada. But April-June. So, we're in that timeframe. And I feel pretty good that we'll be there by the end of the second quarter. And I'm not just saying that. But I don't wanna elaborate any more on it.

Doug Cooper -- Beacon Securities Limited -- Analyst

Okay. And what is the incremental pricing difference between what you got on the wholesale market today versus what you could have got if you sold directly to the retailers?

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Well, you kinda asked me to back into what we're getting now which I don't wanna do. But let's just say in a percentage --

Doug Cooper -- Beacon Securities Limited -- Analyst

Is it 20% premium or 30% premium?

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Yeah. Other than the 40% that's earmarked this year, it would be minimum of 20%.

Doug Cooper -- Beacon Securities Limited -- Analyst

Twenty percent higher. Okay. Great. That's it for me. Thank you, guys.

Operator

Your next question comes from the line of Aaron Grey from Alliance Global Partners. Your line is open.

Aaron Grey -- Alliance Global Partners -- Analyst

Thanks for the question, guys. And congrats on the quarter. So, just two higher level questions from me. First, on the competitive landscape, can you talk about how you see that evolving, especially with the change in new licensing that Health Canada just rolled out and announced yesterday, assuming that does weed out some of the players who aren't really ready to compete and leads to expediting licensing? Now how do you think that impacts the industry dynamics in terms of when you see Canada reach equilibrium of supply and demand and how that impacts your strategy going forward?

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Well, we're analyzing it specifically because it was a little bit nebulous. So, our team up at Pure Sunfarms is working on it over the next days to really understand it. But I can understand Health Canada being inundated with so much. And if they have to deal with a lot of their con processing the initial license requests from companies that will never do anything, they really need to take that noise off because they have their hands full. And I feel for them. So, I think that's a very positive move. And I think there should have been a event -- people should have been screened in the beginning, even years ago and not just apply for licensing online. That's why we took a different course of action because we thought we were gonna go it alone. But it could have taken a long time to get there. So, that's a positive thing from -- that's just my personal opinion.

However, if that is the case, then I think it's gonna start separating -- the train has left the station. And if you're not in it now, in my opinion -- because again, we say everything commoditizes out. And it's a price/demand situation. So, as LPs continue to ramp up their production, the day is gonna come when the music stops us, we say in Village Farms. And that's a day when there's one too many duds out there. And so, I think if somebody's looking to put capital into a new start-up, I think it's gonna be pretty tough because if you're not in the game now, by the time you ramp up, you could be talking three-four years for some of these guys who have no experience, these companies.

So, I think that's a big positive and may even lead to some consolidation of existing players moving forward. So, I think it bodes well for us going that direction. And then the other thing is cost and production. You have to look at what is the cost ultimately of different companies. My opinion, if you're growing indoors -- and I'm not gonna get into people's quality and this quality and that quality and all this. But at some point, the high-cost guys, are they gonna be able to survive long-term? And we're not talking the next few years down the road. So, I think putting some curtailment on it is a good thing.

Aaron Grey -- Alliance Global Partners -- Analyst

All right. Great. Thanks. That's helpful. And then can you discuss your plans in terms of novel form factors as they come online later this year and into 2020? Was there any partnerships you might be looking to form to help roll out those products or any color there on your strategy?

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

No. I think we feel really confident where we're at with Pure Sunfarms. The team our CEOs put together is dynamite. They're in a good place. So, that's not to say the company -- Pure Sunfarms can operate anywhere they want in the world. They have no restrictions. They have a tremendous amount of independence. But yet, they decided, "Let's get it right first at Delta 3. Let's launch the brand. Let's get our retail sales going. Let's build out the next million square feet. Let's continue to execute generate cash flow." And I think that's the right decision for the management team. But that doesn't mean that they would look at opportunities or acquisitions or partnerships or even moving outside of Canada when the time is right. So, we like where they are at this point, building up that experience base of knowledge. And certainly, they could look at many opportunities going forward.

Aaron Grey -- Alliance Global Partners -- Analyst

Okay. Great. Thanks. And then just to clarify, more stuff you guys were talking about with the novel form factors being vapor, edibles, and beverages -- so, no plans with your branded product going forward to go in those categories? You're gonna stick more to vapor as an abstract?

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Absolutely, positively, they do.

Aaron Grey -- Alliance Global Partners -- Analyst

Okay. Yeah. That's more what I --

[Crosstalk]

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

-- the processing license. So, the first thing will be if we rolled another current products that are allowed by Health Canada. That is all in place right now. And extraction by year end because it's gotta start at the extraction point. And as soon as that gets going, and it's working well and up to speed, then it's about product development and rollout. So, they're keenly on that going forward. And we had a -- I think it's been a great thing that Health Canada moved forward on that -- let everybody catch their breath so far. It's a very fast moving industry -- before you take it to the next level. So, we think we're positioned timing-wise very well there.

Aaron Grey -- Alliance Global Partners -- Analyst

Okay. Great. Thanks.

Operator

Again, if you'd like to ask a question, please press * and the No. 1 on your telephone keypad. Your next question comes from the line of Ryan MacDonald from GMP Securities. Your line is open.

Ryan MacDonald -- GMP Securities -- Analyst

Hi. Good morning, guys. Most of my questions have been answered so far. I'm just wondering on the hemp side, in the press release, you mentioned the potential to explore hemp cultivation in Latin America and Mexico. Could you elaborate a little bit on this? In particular, have you explored the possibility of importing that raw material into the US and/or the cannabis extract or the hemp extract into the US?

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

From Canada?

Ryan MacDonald -- GMP Securities -- Analyst

No. Sorry. From Latin America and Mexico into the US.

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Not as yet. But that's clearly on -- let me put it this way. We're well aware that that may be a possibility. If you look, we did mention before and in our press release that as we move forward with the US, the foundation of the US strategy to grow upon, we're clearly looking down south. We have great relationships south of the border. We have ongoing conversations. So, let me put it to you this way. If I knew what I knew now 30 years ago when I built the first greenhouse in Pennsylvania, I would have built the first greenhouse in Mexico simultaneously based on political decisions that have wreaked havoc on the industry. And it's not just greenhouse tomatoes and vegetables. Strawberry guys in the US are suffering. So, it'd be naïve to not take that experience level and be prepared for things that change both for Canada and the US and not have a relationship, at least, in Latin America. So, that's a backward way of answering your question, but yes.

Ryan MacDonald -- GMP Securities -- Analyst

Yeah. Thank you. That's good color. Also, on hemp, you mentioned you're gonna be using five genetics for the initial cultivation in 2019. Can you share with us what the expected concentrations are of those genetics for CBD?

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

They're all different. In general, we're shooting for 10% this year. That's our goal. People are incentivized based on that percentage. But a lot's gonna go into it. As it scales up, more and more of the harvesting manufacturers now are looking at the space. You have to treat the harvest different than others. So, I think it's gonna get better as it goes. The genetics are just starting with these genetics. We have a whole host of these genetics that we're looking at going forward. The difficulty in the US is the .3 THC level. Hopefully, that changes in the future. But at the same time, it's really working on the genetics to have better CBD possibilities while maintaining that .3. So, we've worked hard even on the legislation to have the .3 being measured at the extraction point where we can take out that THC if it's hard. But we'd just be happy to get legislation passed this time around and work on it for next time.

Ryan MacDonald -- GMP Securities -- Analyst

Cool. Cool. And for transitioning to Pure Sunfarms, on the cost lines of margins, do you continue to expect that as production scales up and the production costs per gram go down, then with the added packaging costs, once you start shipping direct to provinces, you can maintain your margins longer-term at their current levels in the 65% to 70% range on the gross margin line?

Stephen Ruffini -- Chief Financial Officer, Executive Vice President, Company Secretary & Director

Certainly, when we add oils. Oils come with a higher margin than that. So, there may be some percentage pressure later in the year, depending on how fast extraction is up and running and, of course, licensed by Health Canada. But the gross margins, the all-in cost of your extracted oil is much higher than our current drive-by margins which are great, certainly, from a tomato perspective. Their 50%-plus gross margins are phenomenal compared to our traditional crops.

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Yeah. And also, on the labor side, unlike produce, post-harvest labor in cannabis is huge. It's equal to the -- it's higher even than the cultural side. So, as you extract, you reduce that cost which is pretty significant going forward.

Ryan MacDonald -- GMP Securities -- Analyst

Cool. Yeah. Thanks for the color there. And lastly for me -- I appreciate all the color you guys gave on the timing of the licensing and the planting of Delta 3 quadrants. Just a high-level question. It sounds like revenue in Q2 could actually double from Q1. Is that reasonable?

Stephen Ruffini -- Chief Financial Officer, Executive Vice President, Company Secretary & Director

Well, we've more than doubled the bio asset quarter-on-quarter from 7.4 to 18.2. So, that's, again, a ve -- that said, the gross mar -- leading into care, gross margin of how strong Q2 could be. And again, that's the gross margin. That's not the sales figure.

Ryan MacDonald -- GMP Securities -- Analyst

Okay. That's all for me. Thank you.

Operator

There are no --

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Thank you, everyone. Look forward to the next report come August. And thank you so much for participating in this call and being part of Village Farms' family here. It's much appreciated. Thank you, Operator.

Operator

There are no further questions. Have a great day.

Duration: 55 minutes

Call participants:

Michael DeGiglio -- Founder, Chief Executive Officer, President & Director

Stephen Ruffini -- Chief Financial Officer, Executive Vice President, Company Secretary & Director

Doug Cooper -- Beacon Securities Limited -- Analyst

Aaron Grey -- Alliance Global Partners -- Analyst

Ryan MacDonald -- GMP Securities -- Analyst

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