Village Farms: From Tomatoes to Cannabis Cash Flow (NASDAQ:VFF) - VFF Stock Research Report

## Executive Summary / Key Takeaways - Transformation Complete: Village Farms has successfully pivoted from a 36-year produce business to a cannabis-focused enterprise, with the May 2025 produce privatization unlocking $40 million in cash and allowing full strategic focus on higher-margin cannabis operations. - Canadian Cannabis Powerhouse: Pure Sunfarms holds the #1 national market share in dried flower and #2 in pre-rolls, generating record Q3 2025 adjusted EBITDA margins of 41% while international medical exports surged 758% year-over-year, creating a high-margin revenue stream that diversifies away from the competitive domestic market. - Netherlands Recreational Breakthrough: Leli Holland's Phase I facility reached full capacity in Q3 2025 with products in 91% of participating coffee shops, while Phase II construction will quintuple capacity to 10,000 kg by Q1 2026, offering access to Europe's most attractive cannabis market with pricing "considerably more favorable than Canada." - Texas Setback, Not Thesis Killer: The December 2025 denial of a Phase I medical license has "zero impact" on financial performance per management, with the application automatically considered in Phase II (April 2026) and retained Texas greenhouse assets providing optionality for future cannabinoid production. - Valuation Disconnect: Trading at $4.07 with an enterprise value of $428 million, VFF generated $20.7 million in quarterly adjusted EBITDA (31% margin) and $10.8 million in net income. ## Setting the Scene: A 36-Year Legacy Reinvented Village Farms International, founded in 1989 and headquartered in British Columbia, spent three decades mastering controlled-environment agriculture before cannabis legalization created an irresistible opportunity. The company's sophisticated greenhouse facilities in Texas and Canada produced premium tomatoes, peppers, and cucumbers, building operational expertise that would prove crucial for cannabis cultivation at scale. This wasn't a speculative startup entering cannabis; it was a proven agricultural operator applying decades of yield optimization, cost control, and quality consistency to a new high-value crop. The cannabis pivot began in 2017 with the launch of Pure Sunfarms, leveraging existing greenhouse infrastructure to become a low-cost producer. By 2024, Pure Sunfarms had captured the #1 national market share in dried flower and #2 in pre-rolls, demonstrating that greenhouse expertise translates directly into competitive advantage. The May 2025 privatization of produce assets into Vanguard Food LP for $40 million in cash represented the final step in this transformation, allowing management to redirect all human and financial capital toward cannabis while retaining a 37.9% equity stake in the produce business for future optionality. VFF now operates across five segments: Canadian Cannabis, U.S. Cannabis, Netherlands Cannabis, Produce, and Clean Energy. The strategic focus has narrowed to three cannabis verticals, each addressing different market dynamics. Canadian operations provide scale and cash flow, Netherlands offers high-margin recreational exposure, and U.S. operations position for federal legalization. This multi-jurisdictional approach diversifies regulatory risk while capitalizing on the global cannabis market projected to exceed $57 billion by 2030.

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## Technology, Products, and Strategic Differentiation VFF's core moat rests on 36 years of greenhouse optimization. Controlled-environment agriculture delivers consistent quality, higher yields, and lower production costs than indoor or outdoor cannabis cultivation. The company's EU GMP-certified {{EXPLANATION: EU GMP-certified,EU Good Manufacturing Practices (GMP) certification ensures that products are consistently produced and controlled according to quality standards appropriate for their intended use. For cannabis, this allows pharmaceutical-grade exports to regulated medical markets, acting as a barrier to entry for competitors.}} Delta 3 facility, recertified in 2025, enables pharmaceutical-grade exports to Germany, UK, Australia, Israel, and New Zealand—markets where quality consistency commands premium pricing. This certification isn't merely regulatory; it's a barrier to entry that few competitors can match, creating a protected high-margin export channel. The international medical export business demonstrates this advantage. Q3 2025 exports surged 758% year-over-year to C$16.3 million, driven by German demand where VFF believes it holds the #1 market share. Management expects to at least triple full-year 2025 international sales, having already achieved this target by mid-year. The implication is clear: international sales carry no excise tax (unlike Canada's 40% tax on branded sales) and command higher margins, transforming the revenue mix toward profitability. In the Netherlands, Leli Holland holds one of only ten licenses for the recreational cannabis experiment. The Phase I facility reached full capacity in Q3 2025, generating $3.6 million in sales with 46% gross margins. Products now appear in 91% of participating coffee shops, reflecting strong consumer acceptance. The Phase II facility, operational in Q1 2026, will quintuple capacity to 10,000 kg annually. Critically, the Dutch market offers zero restrictions on vertical integration and pricing "considerably more favorable than Canada," meaning each kilogram generates substantially higher profit. The integrated clean energy segment, while small, exemplifies VFF's operational efficiency. The Delta RNG project {{EXPLANATION: RNG project,Renewable Natural Gas (RNG) is biogas produced from organic waste that has been processed to pipeline-quality standards. This project converts landfill gas into RNG, providing a sustainable and low-cost energy source for the company's operations.}} converts landfill gas into renewable natural gas, generating $1.3 million in nine-month sales with 83% gross margins. This isn't a side business; it's a model for sustainable, low-cost energy that powers greenhouses and reduces operational expenses, directly supporting cannabis cost leadership. ## Financial Performance & Segment Dynamics VFF's Q3 2025 results validate the strategic pivot. Consolidated net sales rose 21% year-over-year to $66.7 million, while net income from continuing operations reached $10.8 million ($0.09 per share), a dramatic reversal from the $0.8 million loss in Q3 2024. Adjusted EBITDA hit a record $20.7 million (31% margin), up from $4.7 million (8.5% margin) the prior year. These numbers aren't just improvements; they demonstrate that the cannabis-focused model generates sustainable profitability at scale.

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The Canadian Cannabis segment drives this transformation. Q3 sales grew 28% to $46.6 million, with gross margins expanding to 56%—well above the 30-40% target range. Adjusted EBITDA surged 306% to $19.3 million, representing 41% of sales versus 13% in Q3 2024. Management attributes this to favorable pricing, increased international exports (higher margin), lower packaging costs, improved productivity, and summer yield optimization. The segment also generated $21.6 million in excise tax payments, nearly 40% of gross branded sales, highlighting the tax burden that international exports avoid.

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The Netherlands Cannabis segment contributed $3.6 million in Q3 sales and $1.3 million in adjusted EBITDA, both showing sequential growth. With only one month of revenue in Q1 2025, the segment is already profitable and scaling rapidly. The 91% coffee shop penetration rate suggests market capture ahead of capacity expansion, positioning VFF to monetize Phase II immediately upon completion. U.S. Cannabis remains challenged, with Q3 sales declining 15% to $3.3 million due to unregulated hemp-derived product proliferation and state-level restrictions. However, gross margins held at 60%, and adjusted EBITDA remained positive at $332,000. Management is working to reinvigorate sales through GMP-produced natural hemp products and exploring co-manufacturing services. The Texas medical license denial in December 2025 represents a near-term setback, but management emphasizes "zero impact" on financial performance, with the application automatically advancing to Phase II in April 2026 and retained Texas greenhouse assets providing future optionality. The Produce segment, now streamlined through the Vanguard joint venture, contributed $12.8 million in Q3 sales with 16% gross margins. While smaller, it provides stable cash flow and retains the Delta One greenhouse for potential future cannabis conversion. The $4.3 million Q1 2025 dust storm charge demonstrates the weather risks that made the privatization strategically sound, removing volatility from the core cannabis narrative. ## Outlook, Management Guidance, and Execution Risk Management's guidance reveals a clear path to sustained growth. The Delta 2 greenhouse conversion, beginning in Q4 2025, will add 40 metric tons of annual cannabis production by early 2027, increasing Canadian capacity by 33%. At full ramp, 45% of Canadian greenhouse space will produce cannabis, leaving Delta One available for future conversion. The total investment of approximately CAD $10 million will be funded from cash and operations, demonstrating capital discipline. In the Netherlands, Phase II's Q1 2026 launch will quintuple Leli's capacity to 10,000 kg. Management expects this to be a "strong driver of revenue growth" in 2026 while maintaining "relative strength in overall margin performance" versus peers. The 6-megawatt power supply provides a competitive advantage as other operators face power constraints, suggesting VFF can scale more reliably. International expansion continues with plans to enter "multiple new jurisdictions" in the first half of 2026. The company has never shipped through Portugal, identifying it as a compliance risk to avoid—a small but telling detail about management's risk-aware approach. The EU GMP certification renewal and GACP recertification {{EXPLANATION: GACP recertification,Good Agricultural and Collection Practices (GACP) are guidelines for the cultivation and harvesting of medicinal plants, ensuring quality and consistency. Recertification confirms ongoing adherence to these standards, which is crucial for maintaining access to specific medical cannabis markets like Israel.}} for Israeli requirements ensure continued access to high-margin medical markets. The $10 million share repurchase program authorized in September 2025 signals management's confidence in valuation. With $88 million in cash and a net cash position of $53 million against $35 million in debt, the balance sheet supports both organic growth and opportunistic capital returns. The refinancing of Canadian cannabis term loans in Q2 2025, reducing interest rates by 250 basis points below 6% and extending maturity to 2028, further strengthens financial flexibility. ## Risks and Asymmetries The Texas license denial, while framed as "zero impact," introduces execution risk. Multiple law firms announced investigations into potential securities law violations following the December 2025 announcement, and President of Canadian Cannabis Orville Bovenschen sold over 100,000 shares in the past year. These governance concerns could create overhang, though the fundamental business remains unaffected. The Phase II review in April 2026 offers a clear catalyst; failure to secure a license would delay U.S. market entry but wouldn't impair existing operations. Regulatory risk extends to German telemedicine reforms, though management confirms no current operational impact. The Canadian excise tax, at 40% of gross branded sales, remains the single largest cost burden. Any increase would pressure margins, though the shift toward international exports mitigates this exposure. The company must also manage Canadian supply dynamics to avoid oversupply, though management's track record of prudence suggests effective capacity management. Competition intensifies as Tilray (TICKER:TLRY), Aurora (TICKER:ACB), and Canopy Growth (TICKER:CGC) battle for market share. Tilray's beverage dominance and Aurora's medical focus create different competitive pressures, but VFF's low-cost greenhouse production provides a durable cost advantage. The proliferation of unregulated hemp products in the U.S. continues pressuring CBDistillery, though this segment represents just 5% of total sales, limiting downside. Operational risks include weather events like the Q1 2025 Texas dust storms and crop infestations such as the tomato brown rugose virus that triggered prior vendor settlements. While the produce privatization reduces exposure, retained greenhouse assets remain vulnerable. The Vanguard joint venture introduces partner risk; as a 37.9% minority holder, VFF cannot control operations but benefits from eliminated consolidation volatility. ## Competitive Context and Positioning VFF's competitive advantages become clear through peer comparison. Tilray Brands (TICKER:TLRY) leads Canadian cannabis revenue but operates at a -258% profit margin with high debt, while VFF's 6% profit margin and net cash position reflect superior operational efficiency. Tilray's beverage focus diversifies revenue but dilutes cannabis expertise; VFF's pure-play greenhouse model delivers better unit economics in flower and pre-rolls. Aurora Cannabis (TICKER:ACB) shows improving medical margins (69% gross) but remains loss-making with -15.6% profit margins. VFF's recreational market leadership and international export focus create a more balanced growth profile. Canopy Growth (TICKER:CGC) struggles with -138% profit margins and high debt, while VFF's profitability and balance sheet strength provide strategic flexibility. In produce, Limoneira (TICKER:LMNR) operates at -5.7% profit margins with weather-dependent field agriculture, while VFF's controlled-environment approach generates positive cash flow and optionality for cannabis conversion. The greenhouse moat—lower water usage, pesticide-free production, and year-round consistency—creates a sustainability premium that resonates with ESG-focused retailers. VFF's key differentiator is asset conversion flexibility. The retained 2.2 million square feet of Texas greenhouses and 950 acres of farmland provide a clear path to U.S. THC production upon federal legalization. This "when, not if" positioning contrasts with peers' speculative U.S. bets, offering asymmetric upside without current regulatory risk. ## Valuation Context Trading at $4.07 per share, VFF carries a market capitalization of $471 million and enterprise value of $428 million. The company generated $20.7 million in quarterly adjusted EBITDA, implying an EV/EBITDA multiple of 5.17x on annualized Q3 results. This compares favorably to Tilray's 50.9x, Aurora's negative EBITDA, and Canopy's 61.2x, suggesting relative value despite profitability. The price-to-operating cash flow ratio of 10.0x and price-to-free cash flow of 12.4x reflect strong cash generation. With $46.7 million in nine-month operating cash flow and $23.9 million in quarterly free cash flow, VFF converts profits to cash efficiently. The 6.1% profit margin and 22% gross margin trail Aurora's medical-focused 44% gross margin but exceed Tilray's negative margins, indicating operational maturity.

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Balance sheet strength supports the valuation. The 0.13 debt-to-equity ratio and 2.78 current ratio provide ample liquidity for the CAD $10 million Delta 2 expansion and Netherlands Phase II investment. The $10 million share repurchase authorization, while modest, signals management's view that the stock trades below intrinsic value. Peer revenue multiples show VFF at 1.65x sales, below Tilray's 1.70x and Canopy's 3.17x, despite superior growth and profitability. This disconnect suggests the market hasn't fully recognized the strategic transformation. The retained 37.9% Vanguard stake, while non-core, provides additional value not reflected in cannabis segment multiples. ## Conclusion Village Farms has completed a remarkable transformation from produce grower to profitable cannabis operator. The Canadian business generates industry-leading margins through low-cost greenhouse production and high-margin international exports. The Netherlands recreational market offers a new growth vector with superior economics. The produce privatization unlocked cash and focus while retaining upside optionality. The Texas license denial creates near-term headline risk and governance concerns, but the fundamental thesis remains intact. Phase II review in April 2026 provides a catalyst, and retained Texas assets ensure long-term U.S. optionality. Management's track record of execution—evidenced by 758% export growth and record EBITDA margins—suggests effective navigation of regulatory complexity. For investors, the key variables are international export momentum, Netherlands Phase II ramp, and Texas license progression. If VFF continues executing, the current valuation appears disconnected from the business's earnings power and strategic positioning. The greenhouse moat, regulatory licenses, and balance sheet strength provide downside protection, while international expansion and potential U.S. legalization offer asymmetric upside.