5	INVESTMENTS – EQUITY METHOD AND JOINT VENTURES

Pure Sunfarms Corp.

On June 6, 2017, the Company entered into an agreement to form Pure Sunfarms, a B.C. corporation, with Emerald Health Therapeutics Inc. (“Emerald”). The purpose of Pure Sunfarms is to produce, market and distribute cannabis in Canada. Village Farms held a 50%

equity ownership interest in Pure Sunfarms in the form of common shares until November 19, 2019, at which time, upon entering the Settlement Agreement, the Company’s ownership increased to 53.5% through December 31, 2019.

Pursuant to the terms of a Supply Agreement that Pure Sunfarms ha

with Emerald, Emerald ha

a right to purchase 40% of Pure Sunfarms cannabis production at a fixed price, subject to the terms and conditions of the Supply Agreement. To the extent that Emerald d

not fulfill its purchase obligation, Pure Sunfarms

was

able to sell that excess production to other parties in the open market. The Supply Agreement stipulate

that Emerald

was

required to pay Pure Sunfarms the difference between the fixed price and the selling price realized from other parties. During the quarter ended September 30, 2019, Emerald did not fulfill its purchase obligation and Pure Sunfarms sold the product on the open market to arm’s length parties at prices lower than the fixed price in the Supply Agreement. As a result, under the terms of the Supply Agreement, Pure Sunfarms invoiced Emerald for the difference which amounted to approximately CA$7.2 million.

These charges were disputed by Emerald when initially invoiced.

On March 6, 2020 the Company and Emerald closed a Settlement Agreement in order to settle all outstanding disputes with respect to their joint venture Pure Sunfarms. Under the terms of the Settlement Agreement:

•

The 5,940,000 common shares of Pure Sunfarms that were placed in escrow pending Emerald’s CA$5

equity contribution to Pure Sunfarms (originally due in November 2019)

were

cancelled, effective as of November 19, 2019, and Village Farms and Emerald have ceased arbitration proceedings on the matter;

•

Emerald forfeited and waived repayment by Pure Sunfarms of its outstanding CA$13.0 million shareholder loan to Pure Sunfarms (plus accrued interest of CA$1.1 million) and Emerald issued a promissory note to Pure Sunfarms in the amount of CA$952

related to certain amounts it owed Pure Sunfarms under the terms of the Supply Agreement;

•

Pure Sunfarms released Emerald from all

liabilities

arising from their

upply

greement under which Emerald had the provision to purchase 40% of Pure Sunfarms’ aggregate production in 2018 and 2019

including $7.2 million from the quarter ended September 30, 2019;

•

On March 20, 2020,

Emerald transferred 2.5% of additional equity in Pure Sunfarms to Village Farms;

•

Pure Sunfarms and Emerald have released each other from their current supply agreement under which Emerald had the provision to purchase 25% of Pure Sunfarms’ aggregate cannabis production from the Delta facilities in 2020, 2021 and 2022; and

•

Village Farms and Emerald have mutually released each other from all claims related to or arising from the disputes.

The net impact of the Settlement Agreement on the ownership

of Pure Sunfarms, is that as of December 31, 2019, Village Farms owned 53.5% of Pure Sunfarms and Emerald owned 46.5% of Pure Sunfarms.

Effective on the settlement date, March 6, 2020, Village Farms owned 57.4% of Pure Sunfarms

(

note 18

)

In conjunction with the formation of Pure Sunfarms, Village Farms contributed the rights to lease and purchase the Delta 3 land and greenhouse facility to the joint venture. The contribution of the rights has been accounted for as a reduction of the land and greenhouse facility in exchange for the investment in Pure Sunfarms Corp. The net book value of the contributed land and greenhouse facility was $13,950. The Company recorded the investment at net book value. No gain was recognized. Prior to the adoption of ASC 606 the Company measured its nonmonetary equity contributions at the net book value of the assets being contributed with no gain or loss being recognized.

On March 31, 2019, Pure Sunfarms exercised its option to utilize the Delta 2 assets and operations. The contribution of the assets has been accounted for as a disposal of the land, greenhouse facility and other assets in exchange for 25,000,000 common shares of Pure Sunfarms. This was a

non-cash

transaction, and it was estimated that the fair value of the land, building and other assets was $18.7 million (CA$25 million) at the date of contribution. The Company recognized a gain of $13.6 million on the contribution of the fixed assets. As of December 31, 2019 and 2018, the total investment in Pure Sunfarms of US$41.3 million and US$6.3 million, respectively, is recorded in the consolidated statements of financial position. Following the adoption of ASC 606, the Company measures nonmonetary equity contributions at fair value, which provides for recognizing a gain or loss upon the

de-recognition

of the nonmonetary assets. This is contrary to the

non-monetary

contribution of Delta 3 whereby a gain could not be recognized and the investment was recognized at net book value

, as at the time ASC 606 was not applicable.

The Company accounts for its investment in Pure Sunfarms, in accordance with ASC 323 –

Equity Method and Joint Ventures

(“ASC 323”), using the equity method. The Company has determined that Pure Sunfarms is a variable interest entity (“VIE”), however the Company does not consolidate Pure Sunfarms because the Company is not the primary beneficiary. Although the Company is able to exercise significant influence over the operating and financial policies of Pure Sunfarms through its

53.5

% ownership interest and joint power arrangement with Emerald, the Company shares joint control of the Board of Directors and therefore is not the primary beneficiary. The Company’s maximum exposure to loss as a result of its involvement with Pure Sunfarms as of December 31,2019 relates primarily to the recovery of the outstanding loan to Pure Sunfarms.

The Company applies the hypothetical liquidation at book value (“HLBV”) method to determine the ownership percentage for the Company and Emerald. When determining the ownership, the HLBV method only considers shares that have been fully paid for. Therefore, due to the monthly escrow payments being made by Emerald in accordance with the Delta 2 Option Agreement, the ownership will change each month escrow payment(s) are made.

The Company’s share of the joint venture consists of the following

(in $

000

’s of USD)


Balance, January 1, 2018	$	6,511
Share of loss for the year		(171	)

Balance, December 31, 2018	$	6,341


Balance, January 1, 2019	$	6,341
Investments in joint venture		18,717
Share of net income for the year		16,276

Balance, December 31, 2019	$	41,334

Summarized financial information of Pure Sunfarms (in $000’s of USD):


	December 31, 2019			December 31, 2018
Current assets
Cash and cash equivalents (including restricted cash)	$	7,356		$	1,731
Trade receivables		8,687			962
Inventory		21,745			5,101
Other current assets		6,964			730
Non-current assets		108,652			49,074
Current liabilities
Trade payables		(4,938	)		(6,862	)
Borrowings due to joint venture partners		(26,413	)		(2,244	)
Income taxes payable		(8,489	)		—
Borrowings - current		(1,423	)		(19,442	)
Other current liabilities		(5,021	)		(380	)
Non-current liabilities
Borrowings – long term		(13,089	)		—
Deferred tax liability		(2,473	)		—

Net assets	$	91,558		$	28,670

Summarized financial information of Pure Sunfarms (in $000’s of USD):


	December 31,
	2019		2018
Reconciliation of net assets:
Accumulated retained earnings	$	26,679	$	(734	)
Contributions from joint venture partners		63,481		31,008
Currency translation adjustment		1,398		(1,604	)

Net assets	$	91,558	$	28,670

Summarized financial information of Pure Sunfarms (in $000’s of USD):


	Year ended December 31,
	2019			2018				2017
Revenue	$	62,341		$	3,691		$	—
Cost of sales*		(15,067	)		(1,154	)		—
Gross margin		47,274			2,537			—
Selling, general and administrative expenses		(7,882	)		(2,584	)		(701	)
Income (loss) from operations		39,392			(47	)		(701	)
Interest expense		(884	)		(72	)		—
Foreign exchange gain (loss)		(9	)		(176	)		(3	)
Write down of fixed assets		(144	)		—			—
Other income, net		26			18			—
Income (loss) before taxes		38,381			(277	)		(704	)
Provision for income taxes		(10,967	)		55			192
Net income (loss)	$	27,414		$	(222	)	$	(512	)

Included in cost of sales for the years ended December 31, 2019, 2018 and 2017 is $2,671, $796 and $0 of depreciation expense.

Village Fields Hemp USA LLC

On February 27, 2019, the Company entered into a joint venture with Nature Crisp, LLC (“Nature Crisp”) to form VF Hemp for the objective of outdoor cultivation of high percentage cannabidiol (“CBD”) hemp and CBD extraction in multiple states throughout the United States. VF Hemp is 65% owned by the Company and 35% owned by Nature Crisp. Under the terms of the VF Hemp

greement, the Company

as agreed to

lend

up to

approximately US$15 million to VF Hemp for

start-up

costs and working capital.

The Company accounts for its investment in VF Hemp, in accordance with ASC 323, using the equity method. The Company has determined that VF Hemp is a VIE, however

does not consolidate VF Hemp because the Company is not the primary beneficiary. Although the Company is able to exercise significant influence over the operating and financial policies of VF Hemp through its

65.0%

ownership interest and joint power arrangement with Nature Crisp, the Company shares joint control of the Board of Directors and therefore is not the primary beneficiary. The Company’s maximum exposure to loss as a result of its involvement with VF Hemp relates directly to the recovery of the outstanding loan to VF Hemp.

On March 25, 2019, the Company entered into a Grid Loan Agreement (the “Grid Loan”) with VF Hemp, whereby, as of December 31, 2019, the Company had advanced $13,323 in the form of a grid loan to VF Hemp. The Grid Loan has a maturity date of

March 25, 2022

, and bears simple interest at the rate of

% per annum, calculated monthly (note 12).

The Company is not legally obligated for the debts, obligations or liabilities of VF Hemp.

The Company’s share of the joint venture consists of the following:


Balance, beginning of the period	$	—
Investments in joint venture		7
Share of net loss		(2,464	)
Losses applied against joint venture note receivable		2,457

Balance, December 31, 2019	$	—

Summarized financial information of VF Hemp:


	December 31, 2019
Current assets
Cash and cash equivalents	$	510
Inventory		9,308
Prepaid expenses and deposits		36
Non-current assets		1,476
Current liabilities		(1,788	)
Borrowings due to V illage F arms		(13,323	)

Net assets	$	(3,781	)


	December 31, 2019
Reconciliation of net assets:
Net loss for the year ended December 31, 2019	$	(3,791	)
Contributions from joint venture partners		10

Net assets	$	(3,781	)


	Year ended December 31, 2019
Service revenue	$	106
Cost of sales		(232	)
General and administrative expenses		(869	)
Interest expense		(440	)
Write down of inventory		(2,356	)

Net loss	$	(3,791	)