Village Farms International, Inc 8-K/A, filed Dec 17, 2020
Village Farms International, Inc. (VFF)
About this 8-K/A
Village Farms International, Inc filed this 8-K/A on December 17, 2020, reporting on events of November 2, 2020.
Items reported
- Item 2.01: Completed an acquisition or sale of assets
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 2, 2020
VILLAGE FARMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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Canada |
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001-38783 |
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98-1007671 |
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(State or Other Jurisdiction of Incorporation) |
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(Commission File No.) |
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(IRS Employee Identification No.) |
4700-80th Street
Delta, British Columbia Canada
V4K 3N3
(Address of Principal Executive Offices)
(604) 940-6012
(Registrant’s telephone number, including area code)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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☐ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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☐ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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☐ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
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Trading Symbol(s) |
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Name of Each Exchange on Which Registered |
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Common Shares, without par value |
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VFF |
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The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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Item 2.01 Completion of Acquisition or Disposition of Assets. |
On November 2, 2020, Village Farms International, Inc. (the "Company") filed a Current Report on Form 8-K (the "Initial Report") to report the Company's acquisition of 36,958,500 common shares of Pure Sunfarms Corp ("Pure Sunfarms") owned by Emerald Health Therapeutics, Inc.("Emerald") increasing the Company’s ownership of Pure Sunfarms to 100% (the "Pure Sunfarms Acquisition”). The shares were acquired for a total aggregate purchase price of C$79.9 million (US$60.0 million), satisfied through a C$60.0 million (US $45.0 million) cash payment and a C$19.9 million (US$14.5 million) secured promissory note payable to Emerald.
This Current Report on Form 8-K/A (this "Amendment") amends and supplements the Initial Report to provide financial statements of Pure Sunfarms, and the pro forma financial statements of the Company required by Item 9.01 of Form 8-K. No other modifications to the Initial Report are being made by this Amendment. This Amendment should be read in conjunction with the Initial Report, which provides a more complete description of the Pure Sunfarms Acquisition.
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Item 9.01 |
Financial Statements and Exhibits. |
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(a) |
Financial Statements of Business Acquired. |
The unaudited interim financial statements of Pure Sunfarms as of and for the nine months ended September 30, 2020, together with the related unaudited notes to the financial statements, are included as Exhibit 99.2 to this Current Report and are incorporated herein by reference.
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(b) |
Pro Forma Financial Information. |
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The unaudited pro forma combined financial statements of Village Farms as of and for the nine months ended September 30, 2020 and for the year ended December 31, 2019, together with the related unaudited notes to the financial statements, are included as Exhibit 99.3 to this Current Report and are incorporated herein by reference. |
(d) Exhibits.
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Exhibit Number |
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Description |
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99.1 |
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Pure Sunfarms Corp. Audited Financial Statements for the years ended December 31, 2019 and 2018 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on April 1, 2020). |
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99.2 |
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99.3 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: December 17, 2020
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Village Farms International, Inc. |
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By: |
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/s/ Stephen C. Ruffini |
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Name: |
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Stephen C. Ruffini |
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Title: |
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Executive Vice President and Chief Financial Officer |
Exhibit 99.2
Pure Sunfarms Corp.
Condensed Consolidated Interim Financial Statements
For the three and nine months ended
September 30, 2020 and 2019
(unaudited)
Pure Sunfarms Corp.
Condensed Consolidated Interim Statements of Income (Loss) and Comprehensive Income (Loss)
(Unaudited)
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September 30, 2020 |
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December 31, 2019 |
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$ |
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$ |
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Assets |
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Current assets |
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Cash and cash equivalents |
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3,872,605 |
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6,459,395 |
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Restricted cash |
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5,150,096 |
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3,095,809 |
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Trade receivables |
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18,100,069 |
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11,283,003 |
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Notes receivable (note 2) |
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985,951 |
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- |
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GST receivable |
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- |
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1,530,259 |
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Inventories (note 3) |
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63,858,522 |
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40,137,546 |
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Biological assets (note 4) |
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1,382,580 |
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11,608,822 |
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Short-term deposits |
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5,978,377 |
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6,768,162 |
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Prepaid expenses |
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732,100 |
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747,315 |
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100,060,300 |
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81,630,311 |
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Property and equipment (note 5) |
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153,715,091 |
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141,094,523 |
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Intangible assets |
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948,802 |
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22,575 |
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254,724,193 |
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222,747,409 |
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Liabilities |
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Current liabilities |
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Trade and other payables |
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4,573,302 |
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6,413,191 |
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Accrued liabilities |
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12,442,344 |
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6,522,043 |
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Income taxes payable (note 9) |
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2,125,854 |
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11,025,820 |
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GST payable |
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1,028,776 |
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- |
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Due to related parties (note 7) |
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238,049 |
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6,182,335 |
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Deferred revenue |
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102,375 |
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- |
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Borrowings – Current portion (note 6) |
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3,063,848 |
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1,848,584 |
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Borrowings - Shareholder loan (note 7) |
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14,490,852 |
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28,123,490 |
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38,065,400 |
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60,115,463 |
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Deferred tax liabilities (note 9) |
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22,165,343 |
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9,558,444 |
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Borrowings – Long term (note 6) |
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31,687,500 |
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17,000,000 |
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91,918,243 |
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86,673,907 |
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Shareholders' Equity |
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Share capital (note 8) |
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100,060,000 |
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83,350,000 |
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Retained earnings |
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62,745,950 |
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52,723,502 |
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162,805,950 |
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136,073,502 |
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254,724,193 |
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222,747,409 |
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Subsequent events (note 13) |
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The accompanying notes are an integral part of the Condensed Consolidated Interim Financial Statements.
Pure Sunfarms Corp.
Condensed Consolidated Interim Statements of Income (Loss) and Comprehensive Income (Loss)
(Unaudited)
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Three months ended September 30, |
Nine months ended September 30, |
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2020 |
2019 |
2020 |
2019 |
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$ |
$ |
$ |
$ |
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Sales |
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22,626,616 |
23,952,614 |
53,532,734 |
70,668,110 |
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Cost of sales – production (notes 3 and 10) |
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(14,825,933) |
(7,536,045) |
(32,026,907) |
(17,905,506) |
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7,800,683 |
16,416,569 |
21,505,827 |
52,762,604 |
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Change in fair value of inventory sold (note 3) |
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12,986,264 |
31,699,704 |
24,713,519 |
59,124,096 |
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Change in fair value of biological assets (note 4) |
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(5,665,036) |
(19,070,856) |
(21,442,150) |
(74,149,440) |
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479,455 |
3,787,721 |
18,234,458 |
67,787,948 |
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Selling, general and administrative expenses (note 10) |
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3,260,673 |
3,741,846 |
9,089,858 |
7,454,313 |
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Income (loss) from operations |
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(2,781,218) |
45,875 |
9,144,600 |
60,333,635 |
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Interest expense, net |
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512,706 |
399,107 |
982,566 |
789,125 |
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Foreign exchange loss (gain) |
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75,492 |
(18,837) |
282,188 |
(37,480) |
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Other expense (income) (note 7) |
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173,194 |
(11,292) |
(5,849,536) |
(28,537) |
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Income (loss) before income taxes |
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(3,542,610) |
(323,103) |
13,729,382 |
59,610,527 |
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Provision for (recovery of) income taxes |
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Current (note 9) |
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2,125,854 |
3,445,609 |
(8,899,966) |
12,483,852 |
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Deferred (note 9) |
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(3,077,569) |
(1,340,864) |
12,606,900 |
920,162 |
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Net Income (loss) |
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(951,715) |
2,104,745 |
3,706,934 |
13,404,014 |
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The accompanying notes are an integral part of the Condensed Consolidated Interim Financial Statements.
Pure Sunfarms Corp.
Condensed Consolidated Interim Statements of Equity
For the nine months ended September 30, 2020 and 2019
(Unaudited)
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Number of Common Shares |
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Share capital |
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Retained earnings |
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Total equity |
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$ |
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$ |
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$ |
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Balance – January 1, 2019 |
40,000,000 |
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40,000,000 |
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5,523,467 |
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45,523,467 |
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Shares issued (note 8) |
39,990,000 |
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39,990,000 |
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- |
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39,990,000 |
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Shares issued and held in escrow (note 8) |
10,010,000 |
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- |
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- |
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- |
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Net income |
- |
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- |
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46,206,513 |
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46,206,513 |
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Balance – September 30, 2019 |
90,000,000 |
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79,990,000 |
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51,729,980 |
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131,719,980 |
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Balance – January 1, 2020 |
84,060,000 |
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83,350,000 |
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52,723,502 |
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136,073,502 |
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Shares issued (note 8) |
6,177,697 |
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16,710,000 |
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- |
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16,710,000 |
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Shares released from escrow (note 8) |
(710,000) |
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- |
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- |
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- |
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Net income |
- |
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- |
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10,022,448 |
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10,022,448 |
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Balance – September 30, 2020 |
89,527,697 |
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100,060,000 |
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62,745,950 |
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162,805,950 |
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The accompanying notes are an integral part of the Condensed Consolidated Interim Financial Statements.
Pure Sunfarms Corp.
Condensed Consolidated Interim Statements of Cash Flows
For the nine months ended September 30, 2020 and 2019
(Unaudited)
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Three months ended September 30, |
Nine months ended September 30, |
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2020 |
2019 |
2020 |
2019 |
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$ |
$ |
$ |
$ |
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Cash provided by (used in) |
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Operating activities |
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Net comprehensive income (loss) for the period |
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(2,590,895) |
(2,427,848) |
10,022,448 |
46,206,513 |
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Adjustment for items not affecting cash |
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Depreciation and amortization |
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1,346,759 |
942,119 |
3,745,891 |
2,526,601 |
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Fair value changes in biological asset included in inventory sold and other charges |
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(8,703,807) |
7,840,046 |
6,954,870 |
(10,655,588) |
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Unrealized gain on changes in fair value of biological assets |
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(5,665,036) |
(19,070,856) |
(21,442,150) |
(74,149,440) |
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Impairment loss on inventory |
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1,412,389 |
- |
1,412,389 |
- |
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Accrued interest on loan |
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315,660 |
406,312 |
777,206 |
808,208 |
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Other Income (note 7c) |
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- |
- |
(6,043,836) |
- |
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Deferred income tax expense (note 9) |
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(3,077,569) |
(1,340,864) |
12,606,900 |
920,163 |
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Unrealized foreign exchange (gain) loss |
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(51,083) |
(26,718) |
48,521 |
(145,278) |
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Amortization of deferred financing fees |
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42,451 |
20,887 |
103,407 |
56,491 |
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(16,971,131) |
(13,656,922) |
8,185,646 |
(34,432,330) |
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Changes in non-cash working capital |
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Trade receivables |
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(3,182,379) |
(7,519,455) |
(14,947,952) |
(21,665,235) |
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Notes receivable |
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(14,840) |
- |
(985,951) |
- |
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GST receivable |
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1,894,916 |
- |
2,559,035 |
530,339 |
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Short-term deposits |
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(234,779) |
(5,448,738) |
789,784 |
(5,448,568) |
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Prepaid expenses |
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(195,548) |
(547,029) |
15,215 |
(669,795) |
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Inventories |
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20,070,998 |
(2,508,482) |
(32,088,233) |
(8,181,353) |
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Biological assets |
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4,313,286 |
23,859,657 |
31,668,392 |
69,779,684 |
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Trade and other payables |
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(8,153,010) |
2,260,562 |
676,574 |
(4,389,125) |
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Accrued liabilities |
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28,822 |
3,589,641 |
5,409,481 |
4,602,041 |
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Income taxes payable (note 9) |
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2,125,854 |
3,445,609 |
(8,899,966) |
12,483,852 |
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Due to related parties |
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(6,809) |
2,805 |
(5,944,286) |
(2,754,985) |
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Deferred revenue |
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49,875 |
- |
102,375 |
- |
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(274,745) |
3,477,648 |
(13,459,886) |
9,854,525 |
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Investing activities |
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Purchase of intangible assets |
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(182,475) |
- |
(961,995) |
- |
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Purchase of property and equipment |
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(3,420,653) |
(11,974,359) |
(17,776,116) |
(29,712,657) |
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(3,603,128) |
(11,974,359) |
(18,738,111) |
(29,712,657) |
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Financing activities |
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Proceeds from issuance of shares to Emerald Health |
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- |
6,800,000 |
710,000 |
14,990,000 |
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Proceeds from issuance of shares to Village Farms |
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- |
- |
16,000,000 |
- |
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Proceeds from bank loan, net transaction costs |
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4,872,758 |
- |
17,197,136 |
19,777,960 |
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Repayments of bank loan |
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(500,000) |
(500,000) |
(1,500,000) |
(500,000) |
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Interest paid on bank loan |
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(302,149) |
(322,740) |
(741,642) |
(643,619) |
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4,070,609 |
5,977,260 |
31,665,494 |
33,624,341 |
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Net increase (decrease) in cash and cash equivalents |
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192,736 |
(2,519,451) |
(532,503) |
13,766,209 |
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Cash and cash equivalents – Beginning of period |
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8,829,965 |
15,572,914 |
6,459,395 |
2,361,948 |
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Increase in restricted cash |
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(5,150,096) |
(12,363) |
(2,054,287) |
(3,087,057) |
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Cash and cash equivalents – End of period |
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3,872,605 |
13,041,100 |
3,872,605 |
13,041,100 |
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Supplementary schedule of non-cash investing activities |
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Acquisition of property and equipment through issuance of shares to Village Farms International, Inc. |
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- |
- |
- |
25,000,000 |
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The accompanying notes are an integral part of the Condensed Consolidated Interim Financial Statements.
Pure Sunfarms Corp.
Notes to the Condensed Consolidated Interim Financial Statements
(Unaudited)
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1 |
General information |
Pure Sunfarms Corp. (PSC or the Company) was incorporated under the Canada Business Corporation Act on June 2, 2017 and its principal office is located at 4431 80th Street, Delta, British Columbia, Canada. The Company is a joint venture owned by Village Farms International Inc. (Village Farms) and Emerald Health Therapeutics Inc. (Emerald Health). As of September 30, 2020, Village Farms had 58.7% and Emerald Health had 41.3% ownership of the Company (note 13a).
The Company completed the conversion of its first 25-acre greenhouse in April 2019 and is in the process of converting its second 25-acre greenhouse facility in British Columbia for the purpose of growing, packaging and selling cannabis and cannabis extracts pursuant to the regulations of the Cannabis Act.
The unaudited Condensed Consolidated Interim Financial Statements have been prepared in Canadian dollars, which is the Company’s functional currency, and are prepared on the historical cost basis, except for biological assets which are measured at fair value.
The unaudited Condensed Consolidated Interim Financial Statements were authorized for issuance by the Board of Directors on November 13, 2020 and have been prepared in accordance with the International Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including International Accounting Standards 34, Interim Financial Reporting, and do not include all the information required for complete annual financial statements.
These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019.
The accounting policies applied to these unaudited condensed consolidated interim financial statements are consistent with those disclosed in the audited consolidated financial statements for the year ended December 31, 2019.
Coronavirus pandemic (“COVID-19”)
On March 11, 2020, the World Health Organization characterized the COVID-19 outbreak as a pandemic. The outbreak has caused uncertainty in the financial markets and temporary closures of businesses in many jurisdictions in Canada. A lot of countries, including Canada, have issued quarantine orders and taken other restrictive measures in response to COVID-19.
To date, the Company implemented new health and safety protocols to ensure there are no disruptions to the Company’s operations and the Company can continue to service its customers. However, the Company cannot accurately predict the impact COVID-19 will have on its operations and the abilities of others to meet their obligations with the Company. The Company is unable to quantify the potential impact this may have on its future financial results. The impact may be material.
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2 |
Notes receivable |
Pursuant to a settlement agreement dated March 2, 2020 (note 7c), on March 6, 2020, Emerald Health issued a $952,237 promissory note to the Company for products sold to other licensed producers from January 1, 2019 to December 31, 2019. Under the Supply Agreement which was terminated as part of the settlement agreement (note 8), Emerald Health could only sell the purchased products through retail channels. If Emerald Health sold products to other licensed producers, it was required to remit to PSC the difference between the fixed purchase price in the supply agreement less the seller’s fee.
The promissory note bears simple interest at 6.2% (note 13).
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3 |
Inventories |
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September 30, 2020 $ |
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December 31, 2019 $ |
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Pure Sunfarms Corp.
Notes to the Condensed Consolidated Interim Financial Statements
(Unaudited)
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Available for sale - flower |
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21,127,994 |
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15,984,878 |
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Available for sale - flower fair value over cost |
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18,849,427 |
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11,894,554 |
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Distillate oil |
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16,435,726 |
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- |
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Capitalized production costs |
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5,910,332 |
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11,527,154 |
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Packaging materials |
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1,299,759 |
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730,960 |
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Seeds |
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235,284 |
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- |
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63,858,522 |
|
40,137,546 |
|
|
|
|
|
|
During the three and nine months ended September 30, 2020, the cost of inventories expensed and included in the cost of sales related to production cost of sales was $14,825,933 and $32,026,907 respectively (three and nine months ended September 30, 2019 - $7,536,045 and $17,905,506) and for the three and nine months ended September 30, 2020 $12,986,264 and $24,713,519 respectively related to realized fair value included in inventory (three and nine months ended September 30, 2019 -$31,699,704 and $59,124,096). Depreciation expense included in cost of sales for the three and nine months ended September 30, 2020 was $1,275,049 and $2,667,832 respectively (three and nine months ended September 30, 2019 - $665,658 and $1,790,836).
During the three and nine months ended September 30, 2020, the Company recognized a $1,412,389 impairment loss on distillate oil through cost of sales and a $2,811,795 impairment loss on a biological asset adjustment through changes in fair value of inventory sold, in which net realized value on cannabis flower and trim exceeds its costs.
|
|
4 |
Biological assets |
|
|
|
September 30, 2020 $ |
|
December 31, 2019 $ |
|
|
|
|
|
|
|
Opening, biological assets, |
|
11,608,822 |
|
7,387,840 |
|
|
|
|
|
|
|
Increase in biological assets due to capitalized costs |
|
25,167,446 |
|
32,564,713 |
|
Changes in fair value due to biological transformation |
|
21,263,043 |
|
79,465,146 |
|
Transferred to inventory upon harvest |
|
(56,656,731) |
|
(107,808,877) |
|
|
|
|
|
|
|
Ending, biological assets |
|
1,382,580 |
|
11,608,822 |
The following table summarizes the unobservable inputs for the period ended September 30, 2020:
|
Unobservable inputs |
Input values |
Sensitivity analysis |
|
Average selling price Obtained through average selling price or estimated future selling prices if historical results are not available
|
$0.30 - $1.10 per gram |
A 5% increase (decrease) in average selling price would have resulted in an increase or decrease of approximately $222,891 in valuation |
|
Yield per plant Varies by strain and is obtained through historical harvest yield results |
66 – 170 grams per plant |
A 5% increase (decrease) in yield per plant would have resulted in an increase or decrease of approximately $58,336 in valuation |
Pure Sunfarms Corp.
Notes to the Condensed Consolidated Interim Financial Statements
(Unaudited)
|
5 |
Property and equipment |
|
|
Land $ |
Land $ |
Buildings $ |
Machinery and equipment $ |
Information technology $ |
Construction in progress $ |
Total $ |
|
Year ended |
|
|
|
|
|
|
|
|
Opening net book value |
3,700,000 |
397,165 |
44,546,427 |
2,678,610 |
214,030 |
15,067,698 |
66,603,930 |
|
Additions (transfers) |
731,227 |
- |
2,868,415 |
370,713 |
6,798 |
74,238,277 |
78,215,430 |
|
Placed in service |
- |
21,600 |
14,771,323 |
5,559,817 |
81,450 |
(20,434,190) |
- |
|
Write down of property and equipment |
- |
- |
- |
- |
- |
(190,474) |
(190,474) |
|
Depreciation expense |
- |
(20,061) |
(2,896,686) |
(558,149) |
(59,467) |
- |
(3,534,363) |
|
|
4,431,227 |
398,704 |
59,289,479 |
8,050,991 |
242,811 |
68,681,311 |
141,094,523 |
|
|
|
|
|
|
|
|
|
|
At December 31, 2019 |
|
|
|
|
|
|
|
|
Cost |
4,431,227 |
426,814 |
63,059,515 |
8,714,957 |
343,275 |
68,681,311 |
145,657,099 |
|
Accumulated depreciation |
- |
(28,110) |
(3,770,036) |
(663,966) |
(100,464) |
- |
(4,562,576) |
|
Net book value |
4,431,227 |
398,704 |
59,289,479 |
8,050,991 |
242,811 |
68,681,311 |
141,094,523 |
|
|
|
|
|
|
|
|
|
|
|
4,431,227 |
398,704 |
59,289,479 |
8,050,991 |
242,811 |
68,681,311 |
141,094,523 |
|
Additions (transfers) |
(1,399) |
- |
- |
- |
- |
16,332,090 |
16,330,691 |
|
Placed in service |
- |
- |
24,388,446 |
1,947,167 |
- |
(26,335,613) |
- |
|
Depreciation expense |
- |
(15,541) |
(2,807,863) |
(839,330) |
(47,389) |
- |
(3,710,123) |
|
|
4,429,828 |
383,163 |
80,870,062 |
9,158,828 |
195,422 |
58,677,788 |
153,715,091 |
|
|
|
|
|
|
|
|
|
|
At September 30, 2020 |
|
|
|
|
|
|
|
|
Cost |
4,429,828 |
426,816 |
87,447,960 |
10,662,124 |
343,274 |
58,677,788 |
161,987,790 |
|
Accumulated depreciation |
- |
(43,653) |
(6,577,898) |
(1,503,296) |
(147,852) |
- |
(8,272,699) |
|
Net book value |
4,429,828 |
383,163 |
80,870,062 |
9,158,828 |
195,422 |
58,677,788 |
153,715,091 |
|
|
|
|
|
|
|
|
|
Property and equipment include $3,700,000 of contributed land and $41,300,000 of contributed assets for the Delta 2 & Delta 3 facilities. The contribution represents the rights to lease and purchase the land and the greenhouse facility for both locations. These rights were contributed by Village Farms in exchange for 45,000,000 shares in the Company. It was determined that Delta 2 land and greenhouse facility had a fair value of $25,000,000 at the date of contribution. The fair value of the land was determined through an appraisal performed by an independent valuator. The fair value of the greenhouse was determined using the replacement cost model.
|
|
6 |
Long-term loan |
On September 30, 2020, the Company had an aggregate of $45,000,000 loan facility with two Canadian chartered banks and Farm Credit Canada. Interest is payable at the Canadian Bank’s prime rate plus the applicable margin level. The loan has a maximum repayment term of two years and the effective rate for the loan was 3.95%. The Company’s shareholders are guarantors of the loan.
Pure Sunfarms Corp.
Notes to the Condensed Consolidated Interim Financial Statements
(Unaudited)
A term loan of $20,000,000 was entered on February 7, 2019 with Farm Credit Canada and a Canadian chartered bank. The loan has $500,000 non-blended quarterly scheduled repayments plus monthly interest. As at September 30, 2020, $17,500,000 was outstanding on this facility.
A term loan of $12,500,000 was entered on April 2, 2020 with a Canadian chartered bank and mandatory repayments will consist of interest only until March 31, 2021, and non-blended quarterly scheduled payments of $312,500 plus monthly interest thereafter. As at September 30, 2020, $12,500,000 was drawn on this facility.
A term loan of $12,500,000 was secured on June 30, 2020 from a Canadian chartered banking syndicate. The loan has a maximum repayment term of one year and seven months and bears a variable rate of interest which is consistent with the current term loan. Mandatory repayments will consist of interest only until March 31, 2021, and non-blended scheduled repayments of principal plus interest thereafter. As of September 30, 2020, $5,000,000 was drawn on this facility.
The Company is required to comply with financial covenants, measured quarterly. The Company is required to maintain a minimum Fixed Charge Coverage Ratio of 1.50:1, Senior Funded Debt to EBITDA shall not exceed 2.50:1 and Liquidity Coverage shall not be less than $3,000,000 at any time. As at September 30, 2020, the Company was in compliance with the financial covenants.
The Company has a revolving line of credit with a Canadian chartered bank up to a maximum of $15,000,000. Interest is payable at the chartered bank’s prime rate plus the applicable margin rate. As of September 30, 2020, no advances were made on this facility.
|
|
7 |
Related party transactions |
|
|
a) |
Borrowings |
On July 5, 2018, the Company entered into a loan agreement with its shareholders to finance its construction project and to finance general working capital requirements. The principal amount advanced through equal contributions made by each shareholder was $26,000,000.
On March 1, 2020, Emerald Health forfeited and waived repayment of its outstanding $13,000,000 shareholder loan (plus accrued interest of $1,174,721) to PSC. The shareholder loan was offset by $8,130,885 for unconfirmed products charges under the Supply Agreement and $6,043,836 as payment to terminate the Supply Agreement that would have expired on December 31, 2022 (note 7c).
At September 30, 2020, the principal amount due to Village Farms was $13,000,000.
Interest will accrue and be payable on demand being made by the shareholder. The shareholder loan bears simple interest of 8% calculated semi-annually. The loan agreement provides for a retroactive interest rate adjustment should the Company secure financing from an arm’s length lender, in which case the interest on the shareholder loan amounts would be adjusted to equal the third-party interest rate.
The interest rate was reduced to 6.2% on February 7, 2019, 5.2% on December 2, 2019, 3.95% on April 2, 2020 and subsequently increased to 4.20% on August 26, 2020 to reflect the interest rate obtained from third-party lenders.
|
September 30, 2020 $ |
|
|
||
|
Loan principal |
|
13,000,000 |
|
|
|
Accrued interest |
|
1,490,852 |
|
|
|
|
|
14,490,852 |
|
|
|
|
|
|
|
|
|
|
b) |
Due to related parties |
At September 30, 2020, the Company recorded the below amounts payable and accrued to its shareholders, primarily for consulting services and the reimbursement of expenses which occurred during the period:
|
|
|
September 30, 2020 |
|
December 31, 2019 |
|
|
|
$ |
|
$ |
|
Emerald Health |
|
|
|
|
|
Payable to Emerald Health |
|
12,804 |
|
777 |
|
Accrued to Emerald Health |
|
91,291 |
|
87,415 |
|
|
|
104,095 |
|
88,192 |
|
Village Farms |
|
|
|
|
|
Payable to Village Farms |
|
133,954 |
|
66,997 |
|
Accrued to Village Farms |
|
- |
|
87,146 |
|
Amount of terminated additional equity infusion refundable |
|
- |
|
5,940,000 |
|
|
|
133,954 |
|
6,094,143 |
|
|
|
238,049 |
|
6,182,335 |
All amounts are non-interest bearing and are due on demand.
|
|
c) |
Sales and other income |
On December 21, 2018, the Company entered into a Supply Agreement with Emerald Health whereby Emerald Health agreed to purchase 40% of the dried flower (bud) and 40% of the trim produced by the Company until December 31, 2019.
During 2019, the Supply Agreement was extended to December 31, 2022 whereby Emerald Health had agreed to purchase 25% of the bud and 25% of the trim produced by PSC.
On March 2, 2020, Emerald Health entered into a settlement agreement and offset $6,043,836 of shareholder loan as payment to terminate the Supply Agreement that would have expired on December 31, 2022 and agreed to other adjustments between the parties (note 8). Pursuant to the settlement agreement, PSC released Emerald Health from all liability arising from their 2018, 2019 and current Supply Agreement effective March 2, 2020. The Company recognized $6,043,836 as other income arising from this settlement and $606,400 for unconfirmed products pricing shortfall chargeback for the period from January 1, 2020 to March 1, 2020.
|
|
8 |
Share capital |
Authorized
Unlimited number of Class A voting common shares with no par value.
Issued
The Company issued 40,000,000 shares during 2017. Consideration received consisted of $20,000,000 in contributed assets and $20,000,000 in cash.
Emerald Health’s initial capital contribution of $20,000,000 was advanced to the Company in multiple installments based on milestones set out in the Shareholders’ Agreement between Emerald Health and Village Farms. Upon receipt of payment, shares have been released from escrow on the basis of one share per dollar contributed.
On March 29, 2019 the Company agreed to issue 50,000,000 shares, for which consideration of $44,060,000 was received in exchange for 44,060,000 shares. Consideration consisted of $25,000,000 in contributed assets from Village Farms and $19,060,000 cash contribution from Emerald Health. On January 13, 2020, 710,000 shares were released from escrow upon receipt of consideration from Emerald Health.
On March 2, 2020, the joint venture partners, Emerald Health and Village Farms, entered into a settlement agreement. Under the shareholders’ agreement, Emerald Health was obligated to contribute a $5,940,000 equity payment to PSC on November 1, 2019 and defaulted on the equity payment. Pursuant
Pure Sunfarms Corp.
Notes to the Condensed Consolidated Interim Financial Statements
(Unaudited)
to the settlement agreement, the 5,940,000 common shares placed in escrow pending Emerald Health contributing the $5,940,000 equity amount was cancelled effective as of November 19, 2019.
On March 2, 2020, pursuant to the settlement agreement Emerald Health transferred 2,101,500 of PSC common shares that it owned to Village Farms (note 7).
On March 6, 2020, the Company issued 2,689,920 shares to Village Farms for additional equity contributions made on January 24, 2020 for $4,000,000 and $4,000,000 on February 14, 2020 pursuant to the contribution notice issued by PSC to the shareholders on January 16, 2020.
On April 2, 2020, the Company issued 2,777,777 shares to Village Farms for an additional equity contribution of $8,000,000 pursuant to the contribution notice issued by PSC to the shareholders on January 16, 2020.
|
|
9 |
Income taxes payable |
At December 31, 2019, the year-end tax provision was estimated using the accrual method. The Company is eligible to file the 2019 income tax return using cash method and has elected this option. Effective January 1, 2020, the Company adopted the cash basis method to calculate its income tax provision.
This resulted in an adjustment of $8,419,338 to income taxes payable and deferred tax liabilities related to 2019 and income tax recovery of $480,627 for the nine months ended September 30, 2020.
|
|
10 |
Expenses by nature |
The Company’s significant expenses by nature are as follows:
|
|
Three months ended September 30, |
Nine months ended September 30, |
|||
|
|
2020 |
2019 |
2020 |
2019 |
|
|
|
$ |
$ |
$ |
$ |
|
|
Selling, general and administration |
|
|
|
|
|
|
Employee compensation and benefits |
1,126,940 |
1,162,812 |
3,356,618 |
2,850,525 |
|
|
Office expenses |
739,146 |
535,268 |
2,111,032 |
1,520,365 |
|
|
Professional services |
528,158 |
721,937 |
1,420,719 |
1,503,772 |
|
|
Health Canada Regulatory Fee |
443,555 |
906,831 |
1,131,275 |
906,831 |
|
|
Brand & Commercial |
173,298 |
179,267 |
614,296 |
247,804 |
|
|
Other |
249,576 |
235,731 |
455,918 |
425,016 |
|
|
|
3,260,673 |
3,741,846 |
9,089,858 |
7,454,313 |
|
In April 2020, the Government of Canada announced the Canada Emergency Wage Subsidy (CEWS) to help Canadian businesses to keep employees on payroll in response to challenges posed by the COVID-19 pandemic.
During the prior and current quarter, PSC determined that it met the employer eligibility criteria and applied for the CEWS and received $1,937,606 of wage subsidies. On July 17, 2020, the Government of Canada announced that the program would be redesigned and extended until December 2020.
|
|
11 |
Sales |
The Company’s principal source of revenue is from the sale of dried flower (bud) and trim to fulfill purchase orders received from customers. Trim is the by-product of a harvested cannabis plant. During the nine months ended September 30, 2020, sales were made to other licensed cannabis producers, extraction licensed producers in which PSC sold extraction grade dried flower and trim and purchased various forms of distillate oil from the same counterparties (note 3), and four provincial wholesalers, Ontario Retail Cannabis Corporation, BC Liquor Distribution Branch, Alberta Gaming & Liquor Commission and Saskatchewan Liquor and Gaming Authority. Revenue earned from product sales for the nine months ended September 30,
Pure Sunfarms Corp.
Notes to the Condensed Consolidated Interim Financial Statements
(Unaudited)
2020 was $53,532,734. The sales to the Company’s four largest customers represented 20.1% (2019 – 10.9%), 19.5% (2019 – 3.7%), 19.1% (2019 – 0%) and 15.5% (2019 – 0%) of the total sales.
|
|
12 |
Financial instruments |
The following table summarizes the carrying value and fair value of the Company’s financial instruments:
|
|
|
September 30, 2020 Carrying value |
September 30, 2020 Fair value |
|
|
|
$ |
$ |
|
Cash and cash equivalents |
|
3,872,605 |
3,872,605 |
|
Restricted cash |
|
5,150,096 |
5,150,096 |
|
Trade receivables |
|
18,100,069 |
18,100,069 |
|
Trade payables, accrued liabilities and due to related parties |
|
17,253,695 |
17,253,695 |
|
Debt borrowings – related party |
|
14,490,852 |
14,339,989 |
|
Debt borrowings – bank |
|
34,751,348 |
35,720,377 |
|
13 |
Subsequent events |
On November 2, 2020, Village Farms completed the purchase of 36,958,500 common shares of PSC from Emerald Health Therapeutics and owns 100% of the common shares of the Company. As part of the share purchase agreement, PSC cancelled Emerald’s liability for the Note receivable (note 2).
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information presents the unaudited pro forma condensed combined statements of income (loss) for the year ended December 31, 2019 and the nine months ended September 30, 2020 and the unaudited pro forma condensed combined statement of financial position as of September 30, 2020. The unaudited pro forma condensed combined financial information includes the previously reported results of Village Farms International, Inc. (“Village Farms”) and Pure Sunfarms Corp. (“Pure Sunfarms”), both of which were incorporated under the Canada Business Corporations Act, after giving pro forma effect to Village Farms’ acquisition of Pure Sunfarms (the “Pure Sunfarms Acquisition”) described in the following paragraphs and accompanying notes.
The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X and applicable Canadian securities laws. The unaudited pro forma adjustments reflecting the Pure Sunfarms Acquisition have been prepared in accordance with the acquisition method of accounting in accordance with Financial Accounting Standard Board Accounting Standards Codification (“ASC”) Topic 805, Business Combinations.
The unaudited pro forma condensed combined financial information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or consolidated financial condition would have been had the Pure Sunfarms Acquisition actually occurred on January 1, 2019 for the statements of income (loss) and comprehensive income (loss), and on September 30, 2020 for the statement of financial position, nor does it purport to project the future consolidated results of operations or consolidated financial condition for any future period or as of any future date. The assumed accounting for the Pure Sunfarms Acquisition, including estimated purchase consideration, is based on provisional amounts and the associated purchase accounting is not final. The preliminary allocation of the purchase price to the acquired tangible and intangible assets and assumed liabilities is based upon the preliminary estimate of fair values. The unaudited pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable under the circumstances. Actual results may differ materially from the assumptions within the accompanying unaudited pro forma condensed financial information. All pro forma adjustments and their underlying assumptions are described more fully in the notes to the unaudited pro forma condensed combined financial information.
The Pure Sunfarms Acquisition
On November 2, 2020, Village Farms consummated a definitive purchase and sale agreement with Emerald Health Therapeutics Inc. (“Emerald”), acquiring 36,958,500 common shares in the capital of Pure Sunfarms owned by Emerald, and increasing Village Farms’ ownership of Pure Sunfarms to 100%. The shares were acquired for a total purchase price of C$79.9 million (US$60.0 million), satisfied through a C$60.0 million (US$45.0 million) cash payment and a C$19.9 million (US$14.9 million) secured promissory note payable to Emerald and due on May 2, 2021. In connection with the Pure Sunfarms Acquisition, the previous shareholders’ agreement dated as of June 6, 2017, by and between Village Farms and Emerald was terminated as of the closing date of the Pure Sunfarms Acquisition and certain intellectual property was assigned to Pure Sunfarms and licensed to Emerald.
The accompanying notes are an integral part of the Unaudited Pro Forma Combined Financial Statements.
The accompanying notes are an integral part of the Unaudited Pro Forma Combined Financial Statements.
The accompanying notes are an integral part of the Unaudited Pro Forma Combined Financial Statements.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(In thousands of United States dollars, except share and per share data)
|
1. |
Basis of Pro Forma Presentation |
The accompanying unaudited pro forma combined financial information presents the unaudited pro forma statement of income (loss) and unaudited pro forma statement of financial position of Village Farms based on the historical consolidated financial statements of Village Farms and Pure Sunfarms after giving effect to the Pure Sunfarms Acquisition, and pro forma adjustments as described in these notes. Pro forma adjustments are included only to the extent they are (i) directly attributable to the Pure Sunfarms acquisition, (ii) factually supportable, and (iii) with respect to the statement of income (loss) only, expected to have a continuing impact on the consolidated results. The unaudited pro forma statements of income (loss) do not reflect non-recurring expenses directly attributable to the Pure Sunfarms Acquisition, including fees to banks, attorneys, accountants and other professional advisors, and other transaction-related costs. However, the impacts of such expenses incurred prior to the statement of position date are reflected in the unaudited pro forma statement of financial position as accrued liabilities. This amount does not include estimates for fees that are not readily determinable or factually supportable. The unaudited pro forma statement of income (loss) for the year ended December 31, 2019 and for the nine months ended September 30, 2020 give effect to the Pure Sunfarms Acquisition as if it had occurred on January 1, 2019. The unaudited pro forma statement of financial position gives effect to the Pure Sunfarms Acquisition as if it had occurred on September 30, 2020.
Village Farms’ historical consolidated financial statements as of and for the year ended December 31, 2019 and unaudited condensed consolidated financial statements as of and for the nine months ended September 30, 2020 were prepared in accordance with United States’ generally accepted accounting principles (“U.S. GAAP”) and are shown in United States dollars. The historical consolidated financial statements of Pure Sunfarms for the same periods were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards and are shown in Canadian dollars.
The Pure Sunfarms Acquisition has been accounted for using the acquisition method of accounting, which requires an allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed, based on their fair values as of the date of the Pure Sunfarms Acquisition. As of the date of this Current Report on Form 8-K/A, Village Farms has not completed the detailed valuation study necessary to arrive at the required final estimates of the fair value of Pure Sunfarms’s tangible and intangible assets to be acquired and liabilities to be assumed and the related allocations of the purchase price. Village Farms will record all assets acquired and liabilities assumed at their respective acquisition date fair values at the effective time of the Pure Sunfarms Acquisition. As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analysis is performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma financial information presented herein. Village Farms has estimated the fair value of Pure Sunfarms’ assets and liabilities based on discussions with Pure Sunfarms’ management. The final purchase price allocation may be materially different than that reflected in the pro forma purchase price allocation presented herein.
Preliminary Purchase Consideration
The preliminary estimated purchase consideration of approximately $157.3 million was determined as of November 2, 2020, based on $45.0 million of cash consideration and a $14.9 million secured promissory note payable to Emerald due on May 2, 2021, plus the settlement of Emerald’s share of Pure Sunfarms’ pre-existing shareholder loan Farms plus the fair value of Village Farms previously held investment in Pure Sunfarms as of November 2, 2020, valued at an estimated fair value of approximately $1.76 per common share.
The Pure Sunfarms Acquisition constitutes a business combination in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 805 - Business Combinations (“ASC 805”), with Village Farms as the acquirer. Accordingly, Village Farms has applied the principles of ASC 805 to the pro forma accounting for the acquisition of Pure Sunfarms, which requires Village Farms to recognize Pure Sunfarms' identifiable tangible and intangible assets acquired and liabilities assumed at fair value, recognize consideration transferred in the Pure Sunfarms Acquisition at fair value and recognize
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(In thousands of United States dollars, except share and per share data)
goodwill, if any, as the excess of consideration transferred over the net of the acquisition date fair value of identifiable tangible and intangible assets acquired and liabilities assumed.
The table below summarizes the preliminary purchase consideration:
|
|
|
Shares |
|
Share Price |
|
Amount |
|
Consideration paid |
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
$ 45,027 |
|
Promissory Note |
|
|
|
|
|
14,934 |
|
Shareholder loan |
|
|
|
|
|
4,551 |
|
Promissory note owed to PSF from Emerald |
|
|
|
|
|
437 |
|
Fair value of previously held investment |
|
|
|
|
|
|
|
Shares held by Village Farms |
|
52,569,197 |
|
$1.75736 |
|
92,383 |
|
Total fair value of consideration |
|
|
|
|
|
$ 157,332 |
|
|
|
|
|
|
|
|
|
2. |
International Financial Reporting Standards to U.S. GAAP Adjustments |
IFRS differs in certain material respects from U.S. GAAP. The following material adjustments have been made to reflect Pure Sunfarms’ historical consolidated statement of income (loss) for the year ended December 31, 2019 and the nine months ended September 30, 2020 on a U.S. GAAP basis for purposes of unaudited pro forma financial information. In addition, the material adjustments have been made to align Pure Sunfarms’ historical significant accounting policies under IFRS with Village Farms’ significant accounting policies under U.S. GAAP.
(a) Biological Assets
Pure Sunfarms’ biological assets consist of cannabis plants which are not yet harvested. In accordance with IFRS, these biological assets are measured at fair value less cost to sell. Pure Sunfarms capitalizes all related direct and indirect costs of production to the biological assets at each reporting date. At the point of harvest, the biological assets are transferred to inventory at their fair value less costs to sell.
Village Farms’ crop inventory consists of harvested tomatoes, cucumbers and peppers and includes the cost of packaging, direct labor, overhead, and the depreciation of growing equipment and facilities determined at normal capacity. These costs are expensed as cost of sales when the crops are harvested and delivered throughout the various crop cycles, which end at various times throughout the year. In accordance with U.S. GAAP, Village Farms has valued its crop inventory at the lower of cost or net realizable value.
The adjustment reflects the fair value adjustments of Pure Sunfarms’ biological assets reversed at acquisition.
(b) Income Taxes
Reflects the tax effect of the adjustment described above in 2(a).
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3. |
Purchase Accounting and Other Pro Forma Adjustments |
The following adjustments have been made to the unaudited pro forma information to reflect certain preliminary purchase price accounting and other pro forma adjustments. Further review may identify additional adjustments that could have a material impact on the consolidated company. At this time, Village Farms is not aware of any additional transaction related adjustments that would have a material impact on the unaudited pro forma financial information that are not reflected or disclosed in the pro forma adjustments.
Adjustments to the Unaudited Pro Forma Combined Statement of Financial Position
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(In thousands of United States dollars, except share and per share data)
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(a) |
Reflects the cash consideration of $45.0 million Village Farms paid to Emerald for the Pure Sunfarms Acquisition. In addition, the purchase price also included a $14.9 million secured promissory note payable to Emerald. |
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(b) |
Reflects the reversal of Village Farms’ historical equity investment in Pure Sunfarms of $63.2 million; the reversal of Village Farms’ equity in earnings from Pure Sunfarms for the nine months ended September 30, 2020 and for the year ended December 31, 2019 of $5.4 million and $16.3 million, respectively; and a gain of $23.3 million resulting from the re-measurement of Village Farms’ historical investment in Pure Sunfarms to its fair value of $92.8 million. |
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(c) |
Reflects the elimination of amounts owed to Village Farms by Pure Sunfarms which includes the shareholder loan balance of $11.0 million, which includes interest, and $0.1 million owed to Village Farms for consulting services and reimbursement of expenses paid by Village Farms on behalf of Pure Sunfarms. |
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(d) |
Reflects the elimination of Pure Sunfarms’ historical shareholders’ equity. |
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(e) |
Reflects the fair value of the acquired intangible assets and the related deferred tax liabilities calculated using the applicable income tax rate. |
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(f) |
Reflects the difference between the preliminary estimated purchase price and the fair values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed. Village Farms has estimated the fair value of Pure Sunfarms’ assets and liabilities based on discussions with Pure Sunfarms’ management. Based on the preliminary purchase price allocation, Village Farms has calculated goodwill to be $21.5 million. This amount may increase or decrease based on the final purchase price allocation. |
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(g) |
Reflects the amortization of the acquired definite-lived intangible assets. |
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(h) |
Reflects the elimination of historical intercompany interest income and interest expense related to the shareholder loan. |
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(i) |
Reflects the estimated income tax expense based on statutory rates in the jurisdiction in which Pure Sunfarms operates. |
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(j) |
Reflects the adjustment to the weighted average number of common shares for the common shares of Pure Sunfarms acquired by Village Farms from Emerald. |