Executive Summary / Key Takeaways

• Village Farms International is undergoing a significant transformation, strategically pivoting from a diversified produce and cannabis company to focus primarily on high-growth, profitable global cannabis opportunities following the privatization of the majority of its Fresh Produce segment.
• Leveraging decades of controlled environment agriculture (CEA) expertise, the company maintains a competitive edge through cost-efficient greenhouse technology and operational excellence, particularly evident in its Canadian cannabis operations and international expansion efforts.
• The Canadian Cannabis segment demonstrates solid performance, maintaining a top-tier market share position and achieving strong profitability and cash flow, driven by a strategic shift towards higher-margin branded sales and international exports.
• International expansion, especially in the Netherlands recreational market and European medical markets, represents a key growth driver with significantly more favorable margin profiles compared to the Canadian market burdened by high excise taxes.
• The recent privatization of most produce assets provides Village Farms with substantial cash proceeds and allows for focused capital allocation towards its global cannabis strategy, while retaining strategic assets for future U.S. cannabis optionality.

The Roots of a Cannabis Contender

Village Farms International traces its origins back to 1989, built upon a foundation of sophisticated controlled environment agriculture (CEA) expertise in greenhouse cultivation. For decades, the company honed its skills in producing high-quality tomatoes, bell peppers, and cucumbers across extensive facilities in British Columbia and Texas. This deep understanding of plant science, environmental control, and large-scale, low-cost production became the bedrock upon which Village Farms would eventually build its cannabis business.

Approximately eight years ago, recognizing the emerging opportunity in legal cannabis markets, Village Farms strategically leveraged this core competency. It began converting its state-of-the-art greenhouse facilities in Canada for cannabis cultivation under its Pure Sunfarms subsidiary. This was not a simple pivot but a calculated application of existing, highly relevant expertise to a new, high-value crop. This history in CEA provides a distinct competitive advantage, enabling Village Farms to operate as one of the lowest-cost greenhouse cannabis producers globally.

The company's business model has evolved into a multi-segment structure encompassing Produce, Canadian Cannabis, U.S. Cannabis (CBD), Clean Energy, and the newly operational Netherlands Cannabis segment. However, a recent transformative transaction signals a clear strategic shift, positioning Village Farms to concentrate its resources and management focus squarely on the global cannabis opportunity, while maintaining a stake in a newly privatized produce venture.

Cultivation Technology: A Foundational Moat

At the heart of Village Farms' operational strategy lies its advanced greenhouse technology. Unlike many cannabis producers relying on less efficient methods, Village Farms' large-scale, highly automated greenhouses offer significant advantages. These facilities are designed for optimal environmental control, allowing for consistent, high-quality yields year-round.

The tangible benefits of this technology are quantifiable. Greenhouse cultivation, compared to indoor facilities, typically offers substantially lower operating costs, particularly related to energy consumption. While specific comparative figures against all competitors are not detailed, management commentary consistently highlights the low-cost production achieved, contributing to healthier margins even in competitive markets. The company's expertise in yield expansion and labor efficiency, honed over decades in produce, directly translates to its cannabis operations. For instance, recent efforts in the produce segment, prior to privatization, demonstrated meaningful improvements in gross margin driven by these operational efficiencies.

Village Farms continues to invest in technology, including implementing AI and machine automation in its operations. In the U.S. Cannabis segment, the internalization of gummy manufacturing in Q1 2025 is expected to enable greater innovation, operational flexibility, and inventory control. In the Netherlands, the planned Phase II indoor cultivation facility is described as "brand new state of the art," expected to quintuple annual production capacity by Q1 2026. While specific performance metrics for this new facility are not yet available, the strategic intent is clear: leverage advanced cultivation technology to drive profitable growth in a high-margin market.

This technological foundation provides a competitive moat, contributing directly to Village Farms' ability to achieve lower costs of production compared to many peers, supporting its strategy to offer preferred products at attractive prices, and ultimately enhancing its financial performance and market positioning.

Canadian Cannabis: Building a Profitable Beachhead

Village Farms' Canadian Cannabis segment, anchored by Pure Sunfarms and Rose LifeScience, has established itself as a formidable player in a highly competitive market. The segment has consistently demonstrated solid performance, achieving positive Adjusted EBITDA and generating positive cash flow from operations. This stands in contrast to many Canadian licensed producers who have struggled with profitability.

In Q1 2025, the Canadian Cannabis segment reported sales of $34.8 million and Adjusted EBITDA of $6.7 million (CAD 9.6 million), representing a significant increase in profitability compared to the prior year, with Adjusted EBITDA up 75%. The gross margin expanded from 25% in Q1 2024 to 36% in Q1 2025, returning to the company's targeted 30%-40% range. This margin improvement was driven by a strategic shift towards prioritizing more profitable sales channels, including higher-margin international exports and non-branded bulk sales at improved market prices, while consciously moving away from lower-margin value branded products.

Village Farms has achieved notable market share milestones in Canada, maintaining a top-three overall position and holding the number two position in dried flower nationally. It has also secured the number one market share in Ontario and Quebec, Canada's two most populous provinces. The company's focus on quality, innovation (introducing new strains like Neon Lambo and expanding product formats like Super Toast vapes), and execution has driven this success. However, the segment faces a significant challenge in the form of the burdensome Canadian excise tax, which management highlights as the single largest cost of participating in the branded adult-use market, representing nearly 40% of gross branded sales in Q1 2025. This tax burden heavily influences capital allocation decisions and the strategic prioritization of international markets.

Competitively, Village Farms' cost structure and consistent profitability differentiate it from many Canadian peers like Canopy Growth (CGC) and Aurora Cannabis (ACB), who have faced significant losses and operational challenges. While some competitors pursue asset-light models or struggle with overcapacity, Village Farms leverages its integrated greenhouse model and operational discipline. Its focus on profitable growth, rather than simply chasing market share at any cost, positions it for long-term sustainability in the Canadian market.

International Expansion: The Path to Higher Margins

A central pillar of Village Farms' growth strategy is the expansion into international cannabis markets, which typically offer significantly higher margins and are not subject to the onerous excise taxes seen in Canada. The company is actively pursuing opportunities in both medical and recreational markets globally.

The international medical export business, leveraging the EU GMP certification of its Delta 3 facility, is gaining significant momentum. In Q1 2025, international sales increased by a remarkable 285% year-over-year, driven by continued growth in shipment volumes to Australia, Germany, and the United Kingdom, and the addition of New Zealand as a new market. Management expects international medical export sales to triple in fiscal year 2025 compared to 2024, indicating strong anticipated growth in this profitable channel. The company's strains are reportedly holding leading positions in markets like Germany, demonstrating the global appeal of its high-quality flower.

The Netherlands represents a particularly exciting international opportunity. Through its wholly-owned subsidiary Leli Holland, Village Farms holds one of only ten licenses to cultivate and distribute recreational cannabis under the country's Controlled Cannabis Supply Chain Experiment. Sales commenced in February 2025, contributing nearly $0.5 million in revenue in Q1 2025 with a promising 41% gross margin and positive Adjusted EBITDA. Management anticipates pricing of approximately EUR 6 per gram, which is considerably more favorable than in Canada, and expects profitability to be well in excess of Canadian margins, potentially aligning with U.S. segment margins (60%+). The demand from the initial 85 participating coffee shops is expected to outstrip the initial supply from the limited licensed producers. To capitalize on this, Village Farms has broken ground on a Phase II indoor cultivation facility in Groningen, expected to quintuple annual production capacity by Q1 2026. This expansion is a direct investment in a high-ROI international market, contrasting with the cautious approach to Canadian capacity expansion due to the excise tax.

This international focus provides a crucial avenue for profitable growth, diversifying revenue streams away from the challenging Canadian market and positioning Village Farms in nascent legal markets with significant long-term potential.

U.S. Cannabis and Produce: Strategic Optionality and Transformation

Village Farms' U.S. Cannabis segment, operating under the Balanced Health Botanicals brand (CBDistillery), focuses on the CBD market. This segment faces significant headwinds from the proliferation of unregulated hemp-derived products, which has negatively impacted sales. In Q1 2025, U.S. Cannabis sales were $3.9 million, a 14% decrease year-over-year. However, the segment returned to positive Adjusted EBITDA ($0.1 million) and achieved a healthy gross margin of 66%, benefiting from cost efficiencies like the internalization of gummy manufacturing. Management is working to stabilize the business and pursue growth initiatives, anticipating that stricter regulations requiring GMP standards could eventually benefit compliant producers like Balanced Health.

The Fresh Produce segment has historically been a core part of Village Farms, leveraging its CEA expertise. However, it has faced volatility due to market prices and operational challenges like the Q1 2025 dust storms in Texas, which negatively impacted results. In Q1 2025, Produce sales increased 4% to $37.4 million, but the segment reported an operating loss of $7.7 million and negative Adjusted EBITDA of $5.1 million, primarily due to the dust storm impact and lower margins on supply partner volumes.

A major strategic development occurred subsequent to Q1 2025 with the definitive agreement to privatize the majority of the Fresh Produce segment into Vanguard Food LP, a new joint venture backed by private investment firms. Village Farms is expected to receive $40 million in cash proceeds and retain a 37.9% equity interest in Vanguard. This transaction allows Village Farms to focus on its global cannabis business while positioning the privatized produce segment for independent growth with dedicated capital partners. Crucially, Village Farms retains ownership of its Canadian greenhouse assets and specific Texas facilities (Marfa I and Monahans) for potential future U.S. cannabis market optionality. This provides a clear runway for significant cannabis expansion (nearly 5 million sq ft) should U.S. federal or state laws change favorably.

The Clean Energy segment, through the Delta RNG Project, provides a small but growing source of royalty income, expected to contribute approximately $2 million in net income in 2025, adding a stable, incremental profit stream.

Financial Health and Outlook

Village Farms' financial performance in Q1 2025 reflected the mixed results across its segments and the impact of the produce challenges. Consolidated sales were $77.1 million, a slight decrease from $78.1 million in Q1 2024. The company reported a consolidated net loss attributable to shareholders of $6.7 million ($0.06 per share) and consolidated Adjusted EBITDA of $0.1 million. While the produce segment weighed on overall results, the significant improvement in Canadian Cannabis profitability and the initial contribution from the Netherlands segment highlight the strategic shift's potential.

As of March 31, 2025, Village Farms held $15.1 million in cash and cash equivalents and had working capital of $50.3 million. Total long-term debt stood at $34.4 million. Subsequent to the quarter, the company significantly enhanced its financial flexibility through key debt refinancings and the Vanguard transaction. The FCC Term Loan was amended with more favorable financial covenants, and the Pure Sunfarms loans were refinanced and extended to February 2028 with a 50 basis point interest rate reduction. The expected $40 million cash inflow from the Vanguard transaction is anticipated to place Village Farms in a net cash position, providing substantial capital to fund its global cannabis growth initiatives, including the Netherlands Phase II expansion.

The company faces risks, including the need to regain compliance with the Nasdaq minimum bid price requirement by October 13, 2025, and the inherent risks associated with the Vanguard joint venture as a minority owner. Regulatory uncertainty in the U.S. hemp market and the persistent excise tax burden in Canada also remain challenges. However, the outlook is centered on leveraging operational strengths and strategic investments. Management expects international medical export sales to triple in 2025 and is bullish on the long-term, high-margin potential of the Netherlands market as Phase II comes online in 2026. The strategic transformation via the Vanguard transaction is expected to provide the necessary focus and capital to execute this global cannabis growth strategy.

Conclusion

Village Farms International is at a pivotal point in its history, undergoing a strategic transformation designed to unlock value and focus on its most promising growth avenues. By privatizing the majority of its legacy produce business, the company is poised to concentrate its operational expertise and financial resources on the rapidly evolving global cannabis market. Leveraging its deep roots in controlled environment agriculture, Village Farms has built a profitable and cash-generative Canadian cannabis business that serves as a strong foundation for international expansion.

The focus on higher-margin international medical exports and the significant investment in the Netherlands recreational market highlight a clear path towards enhanced profitability and revenue growth, strategically moving away from the challenging economics of the Canadian excise tax environment. While risks remain, particularly regulatory uncertainty and the need to maintain Nasdaq listing compliance, the expected net cash position post-Vanguard transaction provides substantial financial flexibility. For investors, Village Farms represents a unique opportunity to invest in a company leveraging proven operational excellence and a strategic pivot towards high-growth, high-margin international cannabis markets, while retaining valuable optionality for future entry into the potentially massive U.S. market. The success of its global cannabis strategy and the execution of the Netherlands expansion will be critical indicators to watch.