When last writing about Village Farms (VFF) a few weeks back, my recommendation was to use the cannabis company as a playbook for future investments in the sector. My issue with the stock at the time was their lack of progress beyond the initial move into the cannabis sector. Since that article, Village Farms has followed the playbook of the bigger cannabis companies to push the envelope for higher production.
Back on April 1, Village Farms announced an agreement via their 50%-owned joint future to double cannabis production to 150,000 kilograms. The news is crucial for the company considering the general lack of actual expansion into the cannabis sector left Village Farms and their joint venture without much in the way of scale.
Pure Sunfarms exercised its option on the existing 1.1 million square foot Delta 2 greenhouse facility in British Columbia. Village Farms owns the facility and will contribute it to the JV while Emerald Health Therapeutics (EMHTF) will contribute C$25 million to the deal.
The doubled capacity gives Village Farms access to 75,000 kilograms of cannabis by mid-2020. In addition, Pure Sunfarms has an additional 2.6 million square feet with the Delta 1 greenhouse facility to further double cannabis production again. The JV has the right to this greenhouse until September 28, 2021 with Village Farms having the ability to convert and operate the facility for cannabis production, if not exercised by the JV at that point.
The additional greenhouse would have the capability for 180,000 kilograms that Village Farms could either split with Emerald Health or control 100%. Either way, the exercise of the second greenhouse expands the scale and view of the market potential for the company.
The company made a further move to raise C$20 million from a stock offering to further explore hemp production in Texas. Village Farms sold 1,000,000 common shares plus an over-allotment option of another 150,000 shares to Beacon Securities for C$20. In total, the fully exercised deal would bring in C$23 million for a company that ended 2019 with only C$7 million. Considering the Canadian facilities are costing up to C$60 million to retrofit for cannabis, the company will likely need more capital in the future.
Village Farms has 5.7 million square feet of existing greenhouse operations in Texas ready to convent to hemp production. The passing of the 2018 Farm Act leaves the company only waiting on Texas to pass a comprehensive hemp bill.
Village Farms expects their history as a vertically integrated produce supplier to top grocery chains will provide them with an advantage when becoming a leading supplier of branded and private label CBD products produced from hemp. The market will be competitive so the company has an advantage of converting existing facilities and an employee base with connections to those existing retailers.
The key investor takeaway is that the stock is highly volatile and very interesting again as Village Farms goes back on the offensive in the cannabis sector. The combination of expanding cannabis production in Canada to serve the marijuana market north of the border and converting Texas facilities to hemp production to supply the U.S. CBD market sets the company back up for growth that will attract more investors.
With a market value of only $700 million, Village Farms could see another big rally in the stock.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: The author has no position in VFF. The information contained herein is for informational purposes only.