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PURE SUNFARMS ACQUISITION | 9 Months Ended
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Sep. 30, 2021
Business Combinations [Abstract] |
Pure Sunfarms Acquisitions |
8 | 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 an initial C$60.0 million (US$45.0 million) cash payment and a C$19.9 million (US$15.0 million) secured promissory note that was payable to Emerald, which promissory note was repaid in full on February 8, 2021. The acquisition was a business combination and has been accounted for in accordance with the measurement and recognition provisions of Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (ASC Topic 805”). ASC Topic 805 requires that the purchase consideration be allocated to the assets acquired and liabilities assumed in a business combination based upon their estimated fair values at the date of acquisition. The purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The Company used information available to make fair value determinations and engaged independent valuation specialists to assist in the fair value determination of acquired intangible assets. The estimated fair value of licenses was determined using a multi-period excess earnings method. This earnings-based method considers the net present value of the licenses’ cash flows discounted at an asset specific discount rate. The net present value attributable to the licenses deducts the contributory asset charges used in connection with the licenses. The estimated fair value of the brand was determined using the relief-from-royalty method. This method assumes that the brand has value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenues for the related brand, the appropriate royalty rate, and an asset specific discount rate. This measure of fair value requires considerable judgment about the value a market participant would be willing to pay to achieve the benefits associated with the brand. Acquired property, plant and equipment and software were valued using the replacement cost method, which requires the Company to estimate the costs to construct an asset of equivalent utility at prices available at the time of the valuation analysis, with adjustments in value for physical deterioration and functional and economic obsolescence. Upon the acquisition of Pure Sunfarms, the Company identified goodwill of C$30,618 (US$24,087). This goodwill was calculated as the difference between the fair value of the consideration issued for the acquisition of Pure Sunfarms and the fair value of all assets and liabilities acquired. The goodwill is attributable to the acquired workforce and potential for growth through the conversion of the Delta 1 greenhouse facility and future accretive acquisitions. The Company is required to record a deferred tax liability for the difference between the assigned values and the tax bases of assets acquired and liabilities assumed. None of the goodwill is deductible for tax purposes. As a result of the acquisition, the Company also recognized a gain of $23.6 million due to the revaluation of its previously held investment in Pure Sunfarms to its fair value at the acquisition date. The accounting for the business combination was considered complete for the year ended December 31, 2020. The following table shows the allocation of the purchase price to assets acquired and liabilities assumed, based on estimates of fair value, including a summary of the identifiable classes of consideration transferred, and amounts by category of assets acquired and liabilities assumed at the acquisition date:
Consideration paid |  | Shares |  |  | Share Price |  |  | Amount |
Cash |  |  |  |  |  |  |  |  |  | $ | 45,259 |
Promissory note |  |  |  |  |  |  |  |  |  |  | 15,011 |
Shareholder loan |  |  |  |  |  |  |  |  |  |  | 4,529 |
Promissory note owed to PSF from Emerald |  |  |  |  |  |  |  |  |  |  | 439 |
Due to related party |  |  |  |  |  |  |  |  |  |  | 61 |
Fair value of previously held investment shares held by Village Farms |  |  | 52,569,197 |  |  | $ | 1.767 |  |  |  | 92,881 |
Total fair value of consideration |  |  |  |  |  |  |  |  |  | $ | 158,180 |
|  | November 2, 2020 |
ASSETS |  |  |  |
Cash and cash equivalents |  | $ | 10,860 |
Trade receivables, net |  |  | 10,553 |
Inventories |  |  | 32,393 |
Prepaid expenses and deposits |  |  | 3,572 |
Property, plant and equipment |  |  | 122,831 |
Goodwill |  |  | 23,095 |
Intangibles |  |  | 16,670 |
Total assets |  |  | 219,974 |
LIABILITIES |  |  |  |
Trade payables |  |  | 3,849 |
Accrued liabilities |  |  | 13,062 |
Income taxes payable |  |  | 2,173 |
Current maturities of long-term debt |  |  | 2,306 |
Deferred revenue |  |  | 77 |
Long-term debt |  |  | 23,903 |
Deferred tax liabilities |  |  | 16,424 |
Total liabilities |  |  | 61,794 |
Net assets acquired |  |  | 158,180 |
Prior to its acquisition on November 2, 2020, the Company accounted for its investment in Pure Sunfarms, in accordance with ASC Topic 323, Equity Method and Joint Ventures (“ASC Topic 323”), using the equity method. The Company determined that Pure Sunfarms was a variable interest entity (“VIE”), however the Company did not consolidate Pure Sunfarms because the Company was not the primary beneficiary. Although the Company was able to exercise significant influence over the operating and financial policies of Pure Sunfarms through its then 58.7% majority interest, the Company shared joint control of the board of directors and therefore was not the primary beneficiary. For the three and nine months ended September 30, 2020, the Company’s equity earnings from Pure Sunfarms were $1,443 and $5,437, respectively. On March 2, 2020, pursuant to the Settlement Agreement, Emerald transferred to the Company 2.5% of additional equity in Pure Sunfarms. The Company determined the fair value of the equity received from Emerald to be C$6.5 million (US$4.7 million). The Company recorded this amount as a gain and included it as a gain on settlement agreement on the Condensed Consolidated Statement of Income (Loss) and Comprehensive Income (Loss) for the nine months ended September 30, 2020. Summarized financial information of Pure Sunfarms:
|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Sales |  | $ | 27,393 |  |  | $ | 17,048 |  |  | $ | 69,614 |  |  | $ | 39,571 |
Cost of sales* |  |  | (14,244 | ) |  |  | (11,154 | ) |  |  | (44,433 | ) |  |  | (23,678 | )
Gross Margin |  |  | 13,149 |  |  |  | 5,894 |  |  |  | 25,181 |  |  |  | 15,893 |
Selling, general and administrative expenses |  |  | (5,510 | ) |  |  | (2,447 | ) |  |  | (15,131 | ) |  |  | (6,731 | )
Income from operations |  |  | 7,639 |  |  |  | 3,447 |  |  |  | 10,050 |  |  |  | 9,162 |
Interest expense, net |  |  | (563 | ) |  |  | (386 | ) |  |  | (1,362 | ) |  |  | (734 | )
Foreign exchange (loss) gain |  |  | 105 |  |  |  | (56 | ) |  |  | (131 | ) |  |  | (207 | )
Loss on disposal |  |  | — |  |  |  | — |  |  |  | (40 | ) |  |  | — |
Other income, net** |  |  | 131 |  |  |  | (131 | ) |  |  | (188 | ) |  |  | 4,202 |
Income before taxes |  |  | 7,312 |  |  |  | 2,874 |  |  |  | 8,329 |  |  |  | 12,423 |
Provision for income taxes |  |  | (2,024 | ) |  |  | (417 | ) |  |  | (2,654 | ) |  |  | (3,012 | )
Net income |  | $ | 5,288 |  |  | $ | 2,457 |  |  | $ | 5,675 |  |  | $ | 9,411 |
| * | Included in cost of sales for the three months ended September 30, 2021 and 2020 is $1,353 and $961 of depreciation expense, respectively, and for the nine months ended September 30, 2021 and 2020 is $3,944 and $1,973 of depreciation expense, respectively.
** Includes gain recognized on settlement of net liabilities of $4,348.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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