Village Farms International Inc (NASDAQ:VFF) might not be the most well-known cannabis stock, but it’s definitely one of the top marijuana plays around. But the company’s outlook just got a whole lot better.

Among other developments, Village Farms recently announced a settlement agreement that gives it control of the lowest-cost greenhouse cannabis operation in Canada.

Village Farms is already the lowest-cost pot producer, growing crops at just $0.48 per gram. Other marijuana growers are having difficulty getting their costs below $1.00 per gram.

When it comes to scale, cost, and quality, no one can touch this company. Yes, VFF stock’s price has fallen, along with the rest of the cannabis sector, but that just means it’s trading in a better range.

Once the pot industry pushes through its growing pains, Village Farms stock will likely emerge as one of the core cannabis stocks.

VFF Stock Overview

Before recreational marijuana became legal in Canada, Village Farms was known as one of the largest and longest-running producers of greenhouse vegetables in North America. It is also the only publicly traded greenhouse produce company in Canada. (Source: “December 2019 Investor Presentation,” Village Farms International Inc, op. cit.)

But management knew it could use its three decades of experience growing vegetables to transition into the world of cannabis. It only took a few years for Village Farms to become one of the top marijuana producers in North America.

While it’s now known for its cannabis, the company still grows and distributes produce (tomatoes, cucumbers, peppers) to national grocers in the U.S. and Canada from its greenhouses in Texas and British Columbia, as well as from its partner greenhouses in Ontario, British Columbia, and Mexico.

In 2017, Village Farms International Inc formed a 50/50 joint venture with Emerald Health Therapeutics (OTCMKTS:EMHTF, TSXV:EMH) called Pure Sunfarms. It’s now one of the largest legal cannabis growing operations in the world.

The agreement combined Village Farms International’s growing expertise with Emerald Health’s financing, which resulted in the industry’s most cost-efficient grow-op.

Village Farms has been readying itself for the eventual federal legalization of recreational cannabis in the United states.

It has already established two joint ventures, Village Fields Hemp and Arkansas Valley Green and Gold Hemp LLC, for outdoor hemp cultivation and cannabidiol (CBD) extraction. It is also pursuing controlled-environment hemp production at its Texas greenhouse operation.

Pure Sunfarms Production to Double

Pure Sunfarms currently has a full production run-rate of 75,000 kilograms (165,347 pounds) of dried cannabis at its 1.1-million-square-foot “Delta 3” greenhouse in Delta, British Columbia. (Source: “December 2019 Investor Presentation,” Village Farms International Inc, op. cit.)

It is looking to replicate that success at its 1.1-million-square-foot “Delta 2” greenhouse facility.

The first harvest from Delta 2 is expected in mid-2020, with full run-rate annual production of 75,000 kilograms (165,347 pounds) expected in the fourth quarter of 2020. This would double Pure Sunfarms’ annual production to over 150,000 kilograms (330,693 pounds).

Financial Results

It didn’t take long for Pure Sunfarms to contribute to Village Farms International’s bottom line.

In the second quarter ended June 30, 2019, revenue from Pure Sunfarms advanced 125% on a quarter-over-over basis to $24.2 million.

Pure Sunfarms’ net income (before Village Farms’ 50% share) was up 226% quarter-over-over at $27.9 million. That marked the company’s third consecutive quarter of profitability.

In its third quarter ended September 30, Village Farms reported a surprise loss of $5.0 million, but it achieved a year-to-date net profit of $12.5 million.​

Also in the third quarter, Pure Sunfarms achieved its fourth consecutive quarter of positive earnings before interest, tax, depreciation, and amortization (EBITDA).

Dispute & Settlement With Emerald Health

Some of the issues related to Village Farms International Inc’s third-quarter results stem from a disagreement with Emerald Health Therapeutics. As part of the Pure Sunfarms joint venture, Emerald Health was supposed to purchase 40% of Pure Sunfarms’ cannabis production

Emerald didn’t do that.

As a result, Pure Sunfarms had to sell some of its supply on the wholesale market at lower prices than what was in the agreed-upon contract between Village Farms and Emerald.

Because of this, Village Farms said that Emerald owed Pure Sunfarms about $7.2 million for lost revenue. Emerald disputed that claim at first, but on March 3, Village Farms International Inc and Emerald Health Therapeutics announced that they had reached a settlement.

The 50/50 joint venture is no longer. Village Farms’ equity in Pure Sunfarms has increased to 53.5%. Furthermore, Village Farms has agreed to contribute $8.0 million to Pure Sunfarms in 2020, which will raise its stake to 57.4%.

Other details of the settlement include Emerald forfeiting and waiving any repayment by Pure Sunfarms. Moreover, Pure Sunfarms has released Emerald from any liability arising from their supply agreement. Emerald will also no longer be obligated to purchase 25% of Pure Sunfarms’ total cannabis production in 2020, 2021, and 2022.

What all of this really means is that Village Farms now has ownership control in the lowest-cost greenhouse cannabis operation in Canada.

Pure Sunfarms Begins Shipping Cannabis to Alberta

At the end of February, Village Farms announced that Pure Sunfarms began shipping branded dried cannabis products to the Canadian province of Alberta.

With this announcement, Pure Sunfarms’ products are now available in three of Canada’s four most populous provinces (Alberta, British Columbia, and Ontario). That accounts for nearly two-thirds of the country’s recreational cannabis market.

Alberta may only be the fourth-largest province in Canada, but it is home to the largest legal pot retail store network in the country, accounting for 22% of all retail marijuana sales in 2019.

Suffice it to say, for a company with a market cap of just $156.0 million (at the time of this writing), this deal could really juice Village Farms’ bottom line.

Top-Performing Dried Pot Flower Brand in Ontario

There’s more reason to be bullish on VFF stock. In the fourth quarter of 2019, Pure Sunfarms was the top-selling brand of dried cannabis flower through the government-run Ontario Cannabis Store, both in terms of dollars and weight. Ontario is the province with the largest population in Canada.

Village Farms is also pushing for agreements with other provincial governments.

CEO Michael DeGiglio CEO commented, “2020 promises to be a year of significant growth for retail cannabis sales across Canada, and now, with access to nearly two-thirds of the Canadian population and a thriving brand, Pure Sunfarms is well positioned to participate in this market growth based on its leading market share performance.”

Analyst Take

Village Farms International Inc was a great cannabis stock even before it announced a settlement with Emerald Health Therapeutics over Pure Sunfarms.

That blockbuster deal has made Village Farms stock an even better pot stock. The company’s majority stake plus new distribution wins should help fuel Pure Sunfarms’ revenue and profitability. That, in turn, makes VFF stock an even more compelling long-term investment.

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