Village Farms Intl Q3 2026 Earnings Call Transcript

Village Farms Intl (NASDAQ:VFF) reported third-quarter financial results on Monday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Village Farms Intl reported record cannabis revenues of $55 million for Q3 2026, with international sales constituting 43% of this revenue.

Consolidated net sales were $67 million, up 5% sequentially, with a net income of $10 million or $0.08 per share.

The company’s Delta II expansion is on track, expected to reach full capacity by mid-next year, supporting both domestic and international growth through 2028.

International exports grew 75% year-over-year, maintaining strong demand and pricing for EU GMP-compliant products.

The company plans to convert part of its Delta 1 greenhouse for cannabis production due to increasing demand in the EU and Canadian markets.

In Canada, branded sales were $25.3 million, maintaining a top-five market share nationally, though non-branded sales were down due to market conditions.

The Dutch operations saw a sequential decline due to increased plant propagation, but future growth is expected as the Groningen facility is now fully planted.

Village Farms is optimistic about regulatory changes in Texas and is preparing to operationalize its Texas greenhouse for cannabis production.

The company ended the quarter with $80 million in cash and remains in a strong net cash position.

Full Transcript

OPERATOR

Good day and thank you for standing by. Welcome to the Village Farms Intl third quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your first speaker, Michael DiGilio. Please go ahead.

Michael DiGilio (Chief Executive Officer)

Thank you, Tanya, and good morning, everyone, and thank you for joining us today. With me on the call are Hamid Chikachi, Interim Financial Officer, and Gillan Lefebvre, our Chief Operating Officer, and Sam Givens, Senior Vice President of Corporate Affairs and Investor Relations. I’ll start this morning with a review of our Q3 highlights. Then Hamid will cover the financials before our closing comments and analyst questions. Before we begin, though, I’d like to extend a warm welcome to Hamid. On his first call with Village Farms Intl, Hamid stepped into his new role after serving as CFO of the Canadian cannabis business and has 18 years of combined financial leadership and operational experience in cannabis. He knows our business inside and out, and we’re excited to welcome him to our C-suite as Steven Raffini transitions to lead our M&A efforts.

Now, onto the quarter, we delivered record cannabis revenues of $55 million, with approximately 43% of sales coming from some of the world’s most attractive and fastest-growing international markets. Consolidated net sales were 67 million, up 5% sequentially. Net income was 10 million, or $0.08 per share. Adjusted EBITDA improved 18% sequentially to 18.2 million, or 27% of sales, and we delivered operating cash flow of 9.5 million. Most importantly, we’re achieving these results before benefiting materially from increased production capacity.

We have been converting in our Delta, BC and Netherlands facilities, both of which position us for stronger revenue growth and profitability next year. As we noted in this morning’s earnings release, the year-over-year variance in our Q3 gross margins was driven predominantly by a softer spot market for trim in the Canadian wholesale channel and not a reflection of us lowering international export pricing. There is a strong market for our trim to B2B customers in Canada, and these sales typically provide strong contribution margins and profitability for our Canadian operators. However, during Q3 we observed what we believe to be a trough level of trim volumes and trim pricing, with spot trim pricing down about 75% year over year during the quarter.

However, we expect these conditions to begin normalizing in Q4, given the visibility we have from our order book in October, as well as the commencement of some new trim supply agreements with higher contracted pricing more in line with historical levels, which also began last month. Now, moving on to our international business, which remains a powerful point of distinction for our expanding global platform. International export sales grew 75% year over year to 20.8 million, in line with last quarter’s record. As we remain somewhat supply-constrained while awaiting more meaningful production increases from the Delta II expansion, we said for the past few quarters that we expected EU GMP-compliant product would be more insulated from price compression than what we’re observing in non-compliant areas of the European supply chain.

Our Q3 results continue to prove it with resilient pricing that we’ve anticipated. Now, let me be clear: we have not lowered pricing for our EU GMP-compliant product, and our pricing outlook remains favorable, with demand levels that continue to outpace our current supply capabilities. Our average net selling price in Q3 declined by 9% year over year, but this was entirely driven by a mix shift to bulk flower and not a reflection of us aggressively lowering prices as some market participants have speculated so far in this earnings season.

Now I’d like to discuss the broader regulatory landscape in Europe, which we believe is continuing to move more favorably in our direction. Many market participants have recently described price compression in Germany, particularly for converted product—meaning flower cultivated outside EU GMP conditions and certified later in the supply chain. UK and German regulators, including the Hesse government, are tightening requirements around these conversion pathways.

A recent analyst estimates roughly 740 tons of EU GMP certified flower capabilities globally, of which only about 57%, or roughly 420 tons, is EU GMP certified at the source of production. This balance relies on conversion, and that’s where pricing pressure has been most significant. Village Farms represents a very meaningful percentage of existing compliant-at-the-source EU GMP capacity. As we’ve stated previously, our Delta production facility is the world’s largest single-site EU GMP certified cannabis facility, and the vast majority of our production is completed under GMP conditions.

Germany alone expects roughly 300 tons of imports this year, and Australia, Israel, and the UK import more than 150 tons combined. If GMP washing continues to be curtailed, as we’ve seen from the UK and German regulators, the market for truly at-the-source compliant product could face shortages very quickly—and the market won’t just move towards operators with GMP certification. It will move to operators with a consistent flow of quality certified product at the right price that can consistently deliver.

We don’t believe anyone is better positioned to benefit from these dynamics than Village Farms. We built this compliant supply chain organically with the foresight to begin working towards GMP certification nearly six years ago, and we continue to operate this business with industry-leading profitability, which we feel is one of the most attractive, competitively distinct, and independent growth engines across the global cannabis industry. Now I want to turn to the domestic Canadian business, where we’re starting to see new opportunities to grow profitable market share as evolving competitive dynamics here are also leaning in our favor. Branded sales were 25.3 million, and we continue to hold our top-five overall market share position nationally, with our brands in the top 10 in every major product category.

While building this business organically and not through mergers and acquisitions, we continue to make incremental market share gains in vapes and infused pre-rolls during the third quarter, and average net selling prices in the branded channel were up 6% year over year, reflecting our continued focus on higher-value products. Non-branded sales of 3.3 million were down from the prior-year quarter, with the variance driven predominantly by the spot market trim dynamics I discussed earlier.

Now, I’ll be candid. Canada is where we built the foundation for our business, and our objective remains to grow in line with the market at mid-single digits. We haven’t achieved that goal in recent quarters, and we’re not satisfied with that result. We remain committed to providing our provincial partners, retailers, and consumers consistent supply and service levels, and we’ve been allocating the majority of product from the initial harvest from our Delta II expansion to support the domestic Canadian market.

From a competitive standpoint, over the course of the past several months, multiple competitors have indicated they are de-emphasizing Canadian branded sales. Some are exiting the dried flower category entirely, and one in particular has publicly acknowledged that it can’t compete with operators like Village Farms. That means improving competitive dynamics and more room for stronger operators like us with the scale, cost structure, and brands to win long term.

We’re also encouraged by recent actions by the Canadian government to aggressively combat illicit market activities in Canada, as well as by last week’s news of the move to one federal cannabis excise stamp, which we anticipate will create additional operating efficiencies for our business. Cannabis is now the number five cash crop nationally in Canada and the number two cash crop in the province of British Columbia. We’re very encouraged by the government’s increasingly favorable view of this important growth driver for the Canadian economy, and this gives us even more confidence to continue investing in our production, our people, and our product portfolio in Canada.

Our Delta II expansion remains on track for completion in the first quarter, with expectations to reach its full 40 metric ton annual run rate by the middle of next year. The expansion will support continued organic growth in both the domestic and international export markets through 2028, but as noted in this morning’s release, we’re already well ahead on planning for the next steps by exercising our conversion rights with Vidextra Holdings for our D1 greenhouse—that’s our Delta 1 greenhouse.

In mid-October we notified Vidextra to exercise our contractual right to convert 25% of Delta One to cannabis production during 2027, which provides us the optionality to activate an additional 16 acres, or 700,000 square feet, of production. We have no formal conversion plan today, but given increasing demand for EU GMP product and improving conditions in the domestic Canadian market, we felt it prudent to look at our flexibility to move as quickly as possible if and when that changes.

In the Netherlands, Q3 sales were impacted by an increase in plant propagation activities which supported the ramp-up of our operations at the Phase 2 facility in Groningen. This resulted in a sequential decline in sales as compared to the second quarter, but the Groningen facility is now fully planted, which we expect to begin driving stronger revenue growth in the fourth quarter and throughout next year. In September, the Dutch government published its first annual monitoring report conducted by a number of different agencies, and coffee shops, growers, municipalities, and regulators all described their experience with the program as positive.

Product availability has widened, consumers rate price/value more favorably than before the program started, and there was no clear difference in public health, livability, or safety compared to non-participating municipalities. Replacing a tolerated illegal supply chain with a regulated one is not an easy task, but the Dutch government has taken a very thoughtful approach and so far it’s showing a lot of signs of success. We believe consumers are developing a preference for the legal supply chain, and our team is continuing to work closely with local municipalities and policymakers to help build a model framework all stakeholders can be proud of. We’re supportive of revised packaging and labeling requirements to prevent consumers from focusing on high-potency products, and we’re optimistic that recent efforts to formalize administrative processes surrounding the issuance of coffee shop permits may lead to increased store counts in the pilot program in the near-term future.

And then finally, in our U.S., our Balanced Health Botanicals subsidiary is continuing to pursue pathways to participate in the Center for Medicare and Medicaid Innovation pilot program for CBD cannabinoid products. We are awaiting final clarity on the outcome of the pending December 11th federal hemp ban to further assess this opportunity, but we believe BHB is positioned to play a role in this market if federal regulations end up protecting our non-synthetic, full-spectrum products.

I’ll come back to some closing remarks with our views of the changing regulatory landscape across the U.S., and in particular Texas. But now I’d like to hand the call over to Hamid for his review of the financials. Hamid.

Steven Raffini (Chief Financial Officer)

Thanks, Mike, and good morning, everyone. All figures I’ll reference today are in US dollars unless otherwise noted. Q3 consolidated net sales were 66.9 million, up 5% sequentially and level with Q3 last year, driven by record cannabis sales and continued international growth. Consolidated gross margin was 44% compared to 48% last year and 47% in Q2, with the variance driven by softer spot trim market conditions Mike discussed earlier, offset somewhat by stronger performance in our other segment.

SG&A was 24% of sales compared to 23% in Q3 of last year, reflecting higher commercial and marketing spend and the transfer pricing update we discussed last quarter. As a reminder, following the Verdexxa transaction last year, more corporate costs are allocated directly to cannabis, and I’d also like to point out that SG&A as a percentage of sales improved by 500 basis points sequentially and as compared to Q2. Adjusted EBITDA from continuing operations was 18.2 million, or 27% of sales, compared to our record performance of 20.7 million in Q3 of last year and up 18% sequentially from 15.4 million in Q2.

I’d also like to put our year-to-date performance in context. Year-to-date adjusted EBITDA was 43.5 million compared to 41.2 million, which included last year’s one-time 4.3 million vendor settlement. Excluding the vendor settlement, year-to-date adjusted EBITDA is up 18%, continuing to outpace revenue growth with a steady pace of improvement we’ve been delivering throughout 2026. Net income from continuing operations was 10 million, or $0.08 per share, compared to 10.8 million, or $0.09, in Q3 last year and up 7.2 million in Q2.

Cash flow from operations was 9.5 million in the quarter. Turning to the cannabis segment, net sales increased 3% to a record 55 million. International exports increased 75% to 20.8 million, driven by continued strong European demand and in line with Q2’s record performance as we remain somewhat supply constrained while anticipating more meaningful contributions from the Delta II expansion. Canadian branded sales were 25.3 million, down 6% year over year on lower value brand volumes, with an average net selling price up 6%.

Canadian non-branded sales were 3.3 million compared to 7.3 million last year, with the variance driven primarily by lower trim sales. Netherlands sales declined to 2.8 million as a result of the increase in provocation activities, which Mike discussed. US cannabis sales from Balanced Health Botanicals were 2.8 million and reflected continued challenges created by unregulated intoxicating hemp products and related state regulatory restrictions. Cannabis gross margin was 48% compared to 55% last year and 51% in Q2, with the year-over-year variance driven primarily by softer trim sales and a more minor impact of the mix shift of international sales towards bulk flower cannabis. Adjusted EBITDA was 14.7 million, or 27% of sales, compared to 20.2 million in Q3. Cannabis net income was $7.8 million compared to $12 million last year, with the variance driven by lower gross margins and increased operating expenses to support future growth.

Cannabis cash flow from operations was $7.3 million compared to $20.6 million, with the variance driven by Canadian income tax installments that did not occur last year, some longer payment terms on export sales, and a planned inventory build we feel is important to support an increasingly complex global supply chain. And finally, as we always point out, we incurred Canadian excise taxes of 16.5 million in Q3, or 39% of gross branded sales. In our other segment, which includes clean energy and the remaining produce operations in our Delta 1 greenhouse, we generated net sales of 11.9 million, net income of 2.3 million, and adjusted EBITDA of 3.4 million, with year-over-year improvements driven primarily by stronger yields and pricing.

Now turning to the balance sheet, we ended the quarter with approximately 80 million in cash, up 6.3 million sequentially, delivering the stronger second-half free cash flows we discussed on last quarter’s call. Year to date we generated 35 million from continued operations before working capital adjustments. Working capital adjustments have included approximately 19.7 million of income tax payments—essentially a year and nine months of Canadian income taxes—along with higher receivables and inventory.

We invested 17.3 million in capex year to date, primarily expansion capex for Delta II and Groningen, both of which are now substantially complete. Long-term debt was approximately 39 million dollars at a weighted average rate of 5.7%, and our 10 million revolver is undrawn, and we remain in a strong net cash position of $41 million. Before I hand the call back to Mike, a brief reminder of fourth-quarter seasonality in our business for those of you who are new to our story: there is seasonality in our business related to changes in our growing climate for Delta. Throughout the year, contracted produce sales from our Delta 1 greenhouse to our partner Verdexa Holdings always peak in the second and third quarters. Last year they declined about 60% in Q4, and we would expect a similar trend this year in line with this typical seasonality.

Additionally, while our international medical business is still relatively new, last year European order volume slowed significantly over the holiday period in Q4 and resulted in a sequential revenue decline compared to the third quarter. While we haven’t observed any material changes in international customer behavior in October, we think it’s prudent to remind investors that we may experience similar holiday period seasonality again in 2026. International shipment timing and order sizes can create great quarter-to-quarter variability in our financial performance, so we encourage investors to evaluate the performance of this business over a longer time horizon than one quarter. Back to you, Mike, for closing comments.

Michael DiGilio (Chief Executive Officer)

Thanks, Amit. In summary, our Q3 results reflected another very strong quarter of financial performance, yet without yet experiencing material benefit from our expansion projects. As I mentioned, year to date we delivered double-digit growth in cannabis sales, nearly doubled international exports, delivered six straight quarters of positive net income as a pure-play global cannabis company, and we remain in excellent financial position with $80 million in cash to continue investing in our platform.

Our competitive position in Canada is improving, demand for our EU GMP compliant product remains strong, and we’ve importantly not lowered pricing. Our Delta 2 and Chronogen expansions are on the cusp of continuing stronger revenues, and we’re carefully laying the groundwork to continue scaling our footprint throughout Delta One Greenhouse and activation of our Texas assets. Now for some last remarks on our view of the U.S. regulatory landscape. Following last week’s midterm elections, U.S. voters overwhelmingly chose access to cannabis over prohibition. Candidates who supported sensible cannabis policy won across the country and across party lines. Incoming governors in Ohio, Iowa, Wisconsin and Texas campaigned on cannabis reform, and newly elected senators in both parties did the same. In Massachusetts, roughly three quarters of the voters chose to keep adult-use legalization.

In Idaho, voters defeated by a wide margin a measure that would have taken away their ability to enact future cannabis reform. Several states are now poised to take up more meaningful reforms, including Pennsylvania, Iowa, Kansas, Wisconsin and Texas, where voter opposition to the state’s recent THC ban was a central issue in the race for lieutenant governor. The incumbent who championed the THC ban in Texas and was the largest roadblock for cannabis reform was defeated after telling voters to vote him out if they disagreed with the THC ban.

Impact extends to Washington. Leadership is changing at the Appropriations Committee, where federal reform has historically stalled, and we believe this incoming Congress will be the most supportive of cannabis reform in American history. Just as we await the DEA potential rescheduling of legal adult-use cannabis to Schedule 3, the message from voters is clear: Americans want safe, regulated and affordable access to cannabis, and they want their leaders to deliver it.

The landscape just shifted quickly, especially in Texas, and we are optimistic about what it means for patients, consumers and responsible operators like Village Farms Intl. Now in Texas specifically, we believe the outcomes of the midterms were as big of a move for that market as the April final rescheduling order was for medical operators across the U.S. There is considerable political pressure for Democrats in Texas to bring back THC, and they now have the votes in the Texas House, which flipped Democratic, and potentially the Senate, which shifted less Republicans, to significantly reform its medical program and potentially even more towards full legalization.

We believe it is likely we’ll see meaningful changes during this upcoming legislative session, and we’re very encouraged by the things we’re already hearing about how new leadership may be thinking about this major voter issue. Village Farms Intl has been operating in Texas for over 30 years as one of the largest employers in two separate counties, and we’re uniquely positioned to quickly operationalize the critical infrastructure necessary to build a successful cannabis market in Texas. In response to the changing regulatory climate following the Texas midterms, we announced this morning that we are actively mobilizing plans to operationalize our standalone 30-acre, 1.3 million square foot greenhouse in Monahans, Texas for cannabis production.

Monahans is the youngest, most advanced production asset in our portfolio. I personally, along with our asset development and operational teams, have visited the site several times over the course of the past few months, and we have a clear and cost-efficient plan that can bring this facility online within a 12-month time frame. If Texas policymakers are truly serious about enabling their citizens affordable access to high-quality cannabis, they should not continue to ignore the operational expertise and infrastructure of Village Farms Intl.

As we have said many times in the past, we expect to be in Texas cannabis, and we clearly remain focused on pursuing all potential pathways to initiate our U.S. market entry with a commencement of production in Texas. Looking ahead, we believe we are still in the very early innings of global cannabis adoption and that there is a long runway of global growth and opportunities for value creation for Village Farms Intl. For nearly four decades we have led in large-scale controlled-environmental agriculture, and today we are one of the world’s largest and lowest-cost producers of high-quality cannabis.

Scale matters, but scale alone is not our only destination. We intend to evolve from being defined by what we grow to owning the capabilities that determine what is grown, how it performs, where it can be sold and how much value it creates. We are focused on building a platform that expands globally and participates in new value pools as regulated markets evolve. While cultivation, product innovation and distribution remain at the center of our engine today, around that core we see tremendous long-term potential for broader applications of cannabinoids across global markets that will be driven by truly protectable intellectual property.

In the coming years, our industry will drive advancement in scientific and analytical capabilities, accelerate innovation of novel products and commercialization opportunities, and advance development of botanical drugs for medical and therapeutic purposes. Our objective is to own more of the value, more of the intellectual property and the economies created from the plant, which will be sought by patients and consumers, to build a more valuable cannabis company for our shareholders.

The same framework is guiding our approach to M&A. We prefer organic growth opportunities, but we will pursue accretive opportunities that accelerate these capabilities, and we will remain patient and disciplined on valuation and permissible regulatory frameworks. If a deal isn’t strategically compelling to create long-term shareholder value, we simply won’t do it. So I’d like to close with another acknowledgment and thanks to our teams around the world. You all continue to raise the bar for Village Farms Intl in every market we operate, and it’s because of you that we are building one of the most powerful and different types of cannabis platforms in global cannabis. With that, operator, we can open the call now for questions.

OPERATOR

Certainly. As a reminder, to ask a question, you’ll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. Our first question will be coming from the line of Erin Gray of Alliance Global Partners. Your line is open.

Erin Gray (Analyst at Alliance Global Partners)

Hi, good morning. Congrats on the quarter and thank you for the question and the detailed remarks in the prepared. First question I have is relating to the Germany pricing dynamics. Mike, appreciate the color you provided in terms of where you believe VFS stands in the broader market. Just going to maybe summarize: it seems like even without clamping down on EU GMP compliance, you feel confident in your ability to compete in the international market.

And then if greenwashing were more meaningfully cut off, as we’ve seen in some countries, you see that could present meaningful upside given the expected undersupply of full EU GMP compliant product. Just wanted to get some further color in terms of that’s how you’re seeing the current dynamics for international. Thanks.

Michael DiGilio (Chief Executive Officer)

Yeah, I mean we are very confident that the EU GMP compliant product will continue to gain traction going forward. The regulators are showing that, and there’s been a couple situations. I mean Portugal, as you know, the country of Portugal took a position about a year ago, due to a lot of product coming out of Portugal through illicit markets, that really restricts growers from exports. That created a large inventory that has aged out, and we think that had some short-term impact at the pharmacy level as well.

So there are other dynamics. We’ve even heard, you know, everybody’s trying to jump on a bandwagon. There’s been field flower trying to make its way through the process as well. So, you know, I think there will be some headwinds going forward, but we’re just going to stick to continuing to build our EU GMP. Anne, you want to give some color?

Anne

Yes. Good morning, Aaron. Just two more things, just reiterating: we have not lowered our pricing on EU GMP biomass product, and number two, I think your analysis of supply-demand is very accurate. Obviously, the more sought-after EU GMP product still has a very large backlog of demand behind it.

Erin Gray (Analyst at Alliance Global Partners)

Okay, great. Thanks, Mike and Ann, for that. Second question for me, just in terms of capacity allocation. In your prepared remarks you mentioned that some of the initial half of second half of Delta going to the Canadian market versus potentially international. Obviously not all, but just allocating some there as you look to defend share. So maybe just talk about how you value your position in the Canadian market on a longer-term basis, particularly given you might be able to get some higher-margin sales initially if you allocated it towards international.

Michael DiGilio (Chief Executive Officer)

Yeah, well it’s been a difficult balance. That’s really why it led to, over a year ago, the plans to expand the Delta 2 facility, which is now, as we indicated, coming on board. So we’re going to continue to balance the portfolio. But Canada is very important to us, as I mentioned. But we’ve made a statement years ago that we’re only chasing profitable market share. So we continue to try to be more efficient in our portfolio going forward. And we believe, as I mentioned, there are some of our competitors that may be deciding not to pursue Canada.

So we think with the growth we’re having and the fact that the government, the first time in my tenure, is really starting to acknowledge the impact to the overall Canadian economy, is getting behind cutting back on illicit trade. So we think growth is in Canada. It’s a very important market for us, and we think we’ll have the capacity to continue to penetrate increases in the Canadian market.

Erin Gray (Analyst at Alliance Global Partners)

Okay, great. Thanks very much for the color. I’ll jump back in the queue.

OPERATOR

Next question will be coming from the line of Douglas Cooper of Beacon Securities. Your line is open. Douglas.

Douglas Cooper (Analyst at Beacon Securities)

Hey, good morning, everybody, and congrats on a great quarter. Mike, I just wanted to sort of jump around into various geographies, just to confirm, to follow on from Aaron. Can you confirm the number you just said earlier in your presentation about what percentage of EU GMP certified product you believe Village has? What percentage of the overall market?

Anne

Good morning, Jeff. We do not put that out there. We gave you some numbers as to what we see happening on the macro scale and, you know, the size of our footprint in Delta, but we don’t confirm that number publicly.

Douglas Cooper (Analyst at Beacon Securities)

Okay, so you… I just wanted to—maybe I didn’t quite hear it. So you just said that you had the largest single facility of EU GMP certified product, is that correct?

Michael DiGilio (Chief Executive Officer)

We believe we do. We believe we are the largest single facility.

Anne

But we just decided to make the campus EU GMP compliant, so even if it goes to other channels, including domestic.

Douglas Cooper (Analyst at Beacon Securities)

Okay, and what would it—

Michael DiGilio (Chief Executive Officer)

A lot of work. I’ll just add that it wasn’t just a quick decision—quite a bit of work that our teams put in to scale that way.

Douglas Cooper (Analyst at Beacon Securities)

Okay. And sticking with the Delta complex, Mike, you talked about exercising the option for 25% conversion of D1 potentially. What else needs to be done before you actually put, I’m going to say, shovels in the ground to convert 25% of that. And what would be the tonnage you would expect from that if it were converted? And how would you need to make that EU GMP certified facility? About 25%?

Michael DiGilio (Chief Executive Officer)

Well, that 25% is actually bigger than the expansion of Delta 2, which is 40 tons. So probably in the area of 50 to 60, we have the optionality to convert one quarter of it over a four-year period. So just to be clear, we trigger the optionality if we were going to convert it sometime next year for ’28, no decision has been made, but we have the right to do that. So that’s what it could lead to. Because 700,000 square feet, the Delta 2 second-half conversion was about 550,000.

So doing the math, would probably be about 50 metric tons for that additional quarter.

Douglas Cooper (Analyst at Beacon Securities)

Okay. And then, Doug, I was—

Anne

Doug, I would just add that if it’s concurrent with putting shovels in the ground, we’d be working on the processing side where the EU GMP certification lies. So we’d be running both of those in parallel, just like we’ve done throughout this year as we add capacity.

Douglas Cooper (Analyst at Beacon Securities)

Mike, you said you thought trim pricing had troughed in Q3. It was down 75% year over year. Was there any material change in pricing between Q3 and Q2, the prior quarter?

Anne

I don’t think so. I think it was just a fallaway of the demand, Doug.

Douglas Cooper (Analyst at Beacon Securities)

But no change in pricing?

Anne

That’s correct.

Douglas Cooper (Analyst at Beacon Securities)

Okay. And final one for me, just on the US side, obviously you’re very bullish about the progress in Texas. You don’t have a license, I don’t believe so. What does it take for you to actually get in the cannabis production space and be able to participate in that market if it opens up?

Michael DiGilio (Chief Executive Officer)

Well, I just say that we plan to be in Texas one way or another, so how we do it, we’ll have to see. We think there’s going to be a number of regulatory changes in this session coming up in February to the TCUP program, which may include increasing licenses. That could be a vector for us or another way to get into the market. But we’re very confident, we’re very confident that we can and we’ll pursue all permissible pathways for us. But we want to start getting this facility ready.

So we’re kind of going to run it in a parallel track as opposed to serial. The facility’s there. It’s just a matter of sort of gearing it up and then providing conversion. And we may do that in phases as we go, not all at once.

Douglas Cooper (Analyst at Beacon Securities)

And how long would that take and how much?

Michael DiGilio (Chief Executive Officer)

Well, if you look at Delta 2, the conversions are like six months. So we’d probably do some work to it ahead of time before we actually started the conversion on the growing systems. The unique thing about that area, which is very unique, as you know, that part of Texas is about the lowest latitude in the United States. So you don’t need supplemental lighting to run a cannabis crop through the winter. I mean, it could help increase yield, but it’s not required. So we think we’ll have even a cost advantage over our Delta facilities longer term. And that makes it very unique in that regard.

Douglas Cooper (Analyst at Beacon Securities)

Okay, perfect. Thanks very much.

Michael DiGilio (Chief Executive Officer)

Thanks, Doug.

OPERATOR

Our next question will be coming from the line of Frederico Gomes of ATB Cormark. Your line is open, Frederico.

Frederico Gomes (Analyst at ATB Cormark)

Yes, good morning. Thanks for the questions here and congrats on a great quarter. I want to go back to the comment about EU GMP and the fact that your pricing has been relatively resilient and steady. I guess, could you talk about that? I mean, why is it that from a pricing standpoint, EU GMP compliant product is more resilient compared to, I guess, greenwashed product? And then second, I know that you mentioned the potential for tightening controls around the greenwashing, but are you actually seeing that happening?

I mean, how likely is it to happen and how likely is it that we could see, I guess, a product shortage of EU GMP compliant product at the source? Thank you.

Michael DiGilio (Chief Executive Officer)

Well, I’ll start it out and I’ll hand it over to Ann. I think, you know, the program is really originally set up to have EU GMP certification at the source. So that’s really what the program’s about. There are other ways to get there in a supply chain. As I mentioned in my prepared remarks, there will probably always be a country trying to do that and there are distributors who, you know, in order to get the capacity they need, are buying GACP product and then converting it through the supply chain.

So we think where anybody producing EU GMP product at the source is sort of the standard. But there are other ways to do it. Ann, you want to add some color?

Anne

Yeah, I would just say that I think the winds seem to be in favor of the EU GMP compliant product as we’ve seen in the UK and in the Hudson State. And so we think that that’s noteworthy and frankly what we’ve talked about for a couple of quarters now. So the demand profile is still there, supporting the price, Frederico. And we think that that’s. How do you ensure an efficient supply chain, frankly, from the source right through to the consumer. And the supply chain cares very much about that.

Michael DiGilio (Chief Executive Officer)

You want to add some color?

Steven Raffini (Chief Financial Officer)

Yeah, just to add a bit of color on that. I mean, one thing is looking at price and one thing is looking at the level of scale of EU GMP compliant product that we produce that’s low cost and high quality. And the supply chains are very complex and there is a value to be ascribed to being able to provide a large volume of EU GMP compliant product as opposed to various small lots that often we see in the marketplace. And that’s a competitive moat that we have, we believe, and one of the key factors that we believe will maintain price as we look forward.

Frederico Gomes (Analyst at ATB Cormark)

Thank you, appreciate that. That makes sense. And then in regards to the, I guess, the decline in price of trim and you think that’s the bottom in Q3, why is that? And in terms of supply-demand balance in Canada, it seems like you were more constructive going forward. Can you talk a little bit about that as well? Thank you.

Anne

Yeah, I mean, the variances that we ascribed in the remarks was really a year-over-year perspective. And, you know, the market has changed over the course of a year. However, we do believe that there was a buildup of large producers that were more in the 2.0 space and those inventory builds have largely dissipated, and we are seeing increasing demand and requests from our peer group for high-quality trim. So we are seeing that demand and supply rebalance, which we’re confident of the forward-looking projections of our trimming.

Frederico Gomes (Analyst at ATB Cormark)

Great, thank you.

Anne

You’re welcome.

OPERATOR

As a reminder to ask a question, please press star 11 from your telephone and wait for your name to be announced. Our next question will be coming from the line of Pablo Zuniak of Zuniak and Associates. Your line is open, Pablo.

Pablo Zuniak (Analyst at Zuniak and Associates)

Thank you and good morning everyone. Mike, I guess a two-part question. Can you talk about how concentrated is your international business? Is it one, two customers or is it a long list? Is one of your customers 50, 60% of your sales? I don’t know how much you can talk about that, but obviously congrats on the $56 million year to date in international exports and 21 in the third quarter. But if you can talk about that. And then the second point which I have asked in prior calls, you know, obviously the power right now is on the supply chain, EU GMP compliant, low cost, high quality cultivation which you have.

But given everything that’s happening on the M&A front, do you see a need now to start investing in route to market in markets like Germany and the UK? Thank you.

Michael DiGilio (Chief Executive Officer)

Yeah, we don’t really disclose, Pablo, how many customers we have, but it’s more than one. No, just kidding aside, we have multiple customers in Europe, but I don’t want to really disclose those numbers and we see that increasing over the next couple years. You know, we were planning, and this is one topic I didn’t touch on, to enter some other countries in Europe. But to be honest with you, we sort of curtailed that because we’re capacity constrained in meeting the demand of current customers in the markets we’re in.

So I think that has a chance of opening up once again next year as this additional capacity comes on, and that will increase the amount of distributors we work with. So that’s that question. M&A question—say again.

Anne

Pablo asked us about the route to market. If we have any interest in pursuing that. Well,

Michael DiGilio (Chief Executive Officer)

We do. I mean, you know, it depends how we look—probably won’t go too deep into this—but really, look, what’s that landscape going to look like in two or three years from now, as opposed to right now? I think there may be some dynamics that the future could be somewhat different than it is today. That being said, valuation always plays a role in that. And I’ll be honest with you, I think some values are crazy, for lack of a better term. So we’re not going to do a deal that isn’t accretive or doesn’t make sense just for the sake of doing it.

But we are always in discussions and looking at opportunities there. Vertical integration is part of our DNA and at some point we’re going to get there one way or another.

Pablo Zuniak (Analyst at Zuniak and Associates)

Thank you. And then just one last question on the Netherlands. You know, some of your peers there are complaining about price compression. I don’t know if you want to put that in context there. How bad is it? I know you’re still capacity constrained in that market, but as prices come down, doesn’t that move, you know, I guess it tilts the balance towards the lower-cost greenhouse operators versus the indoor ones? But again, if you can give us some context there, that’s the first part to the Netherlands question.

And the second one, you know, I think we are down now to 70 coffee shops from the initial 85. So is that creating a problem and how do you see that changing? Thank you.

Michael DiGilio (Chief Executive Officer)

Well, again, you know, let me answer the second question first. I mean, when we got involved in the Netherlands, there was a risk to it in that it’s a four-year deemed experiment. We knew that each year the Dutch government will publish their findings. We know that they want to move to a legalized, regulated structure at some point, but we don’t have a crystal ball to be able to guarantee where it will be in three years from now. But we’re working together and we’re actually working with some others to open more doors.

You know, it’s very oriented to the municipality. The municipalities in the Netherlands are—each one operates independently and has significant power to decide if they want to move to a legal platform. So yes, some coffee shops dropped out, but as capacity increases there could be some pricing pressure. There may be, but we feel we’re in a pretty steady-eddy state for at least next year and we’ll reevaluate. As far as your first question, which was price compression.

Price compression? Yeah. I mean, you know, I don’t want to talk about our competitors necessarily. I mean, we’ve heard a lot of things, sometimes question the source, where it’s coming from. But, you know, as Amid had said on the call, just having EU GMP-compliant product at the source like we do is just one component of the success you need to have to be able to deliver large-scale product and get it out the door in a consistent month-to-month, order-to-order basis is a huge undertaking, and I think it’s very underestimated by many others in the space.

You’re talking pharmaceutical-grade product; there is no higher standard that you need to meet day in and day out. So it’s not just the fact that you have EU GMP; it’s the fact that you can deliver on these orders and you have an organization behind it to do it. So I think others are scrambling because they don’t have EU GMP or they haven’t been able to get certified, so they’re looking at many other ways to circumvent the system. And I think there will be a reckoning coming in the next year or two in which way it goes.

That’s the best color I can give you. Pablo.

Pablo Zuniak (Analyst at Zuniak and Associates)

Okay, that’s good. Thank you.

OPERATOR

And I would now like to turn the conference back to Mike Digilio for closing remarks.

Michael DiGilio (Chief Executive Officer)

Well, I just want to thank everybody’s participation. I think it’s very exciting times globally, and now even more so in the U.S. I think the U.S. is going to go through quite a change in who are the survivors going to be at some point, more states opening up, interstate commerce down the road. We certainly want to have scale and be a very low-cost producer. We thank you for joining us today and look forward to a wonderful holiday season for everybody and updating in the new year.

Thank you, operator.

OPERATOR

This concludes today’s program. Thank you for participating. You may now disconnect.

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