UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

(Mark One)

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended ~~June 30, 2020~~March 31, 2021

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from to

Commission File Number 001-38783

VILLAGE FARMS INTERNATIONAL, INC.

(Exact name of Registrant as Specified in its Charter)

Canada

~~Canada~~

98-1007671

(State or other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

4700-80th Street

Delta, British Columbia Canada

V4K 3N3

(Address of Principal Executive Offices) (Zip Code)

(604) 940-6012

Issuer’s phone number, including area code

N/A

(Former name, former address and former fiscal year, if changed since last report).

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares, without par value	VFF	The Nasdaq Stock Market LLC

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the ~~past~~preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files. Yes ☒ No ☐ Not Applicable ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “small reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~August 12, 2020, 56,474,084~~May 6, 2021, 81,191,191 shares of common stock were issued and outstanding.

TABLE OF CONTENTS


		Page
PART I - FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Interim Financial Statements (Unaudited)
	Condensed Consolidated Interim Statements of Financial Position		1	2
	Condensed Consolidated Interim Statements of Income (Loss) and Comprehensive Income (Loss)		2	3
	Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity		3	4
	Condensed Consolidated Interim Statements of Cash Flows		4	5
	Notes to Condensed Consolidated Interim Financial Statements		5	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27	31
Item 4.	Controls and Procedures		27	31

PART II - OTHER INFORMATION			28	33
Item 1.	Legal Proceedings		28	33
Item 1A.	Risk Factors		28
~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~33		28
~~Item 5.~~	~~Other information~~		28
Item 6.	Exhibits		28	33

	Signatures	34

	~~Signatures~~		30

PART 1 – FINANCIAL STATEMENTS

Item 1. Financial Statements

Forward Looking Statement

As used in this Quarterly Report on Form 10-Q, the terms “Village Farms,” “Village Farms International,” the “Company,” “we,” “us,” “our” and similar references refer to Village Farms International, Inc. and our consolidated subsidiaries, and the term “Common Shares” refers to our common shares, no par value. Our financial information is presented in U.S. dollars and all references in this Quarterly Report on Form 10-Q to “$” means U.S. dollars and all references to “C$” means Canadian dollars.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor created by those sections. This Quarterly Report on Form 10-Q also contains “forward-looking information” within the meaning of applicable Canadian securities law. We refer to such forward-looking statements and forward-looking information collectively as “forward-looking statements”. Forward-looking statements may relate to the Company’s future outlook or financial position and anticipated events or results and may include statements regarding the financial position, business strategy, budgets, expansion plans, litigation, projected production, projected costs, capital expenditures, financial results, taxes, plans and objectives of or involving the Company. Particularly, statements regarding future results, performance, achievements, prospects or opportunities for the Company, the greenhouse vegetable industry or the cannabis industry are forward-looking statements. In some cases, forward-looking information can be identified by such terms as “outlook”, “may”, “might”, “will”, “could”, “should”, “would”, “occur”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “try”, “estimate”, “predict”, “potential”, “continue”, “likely”, “schedule”, “objectives”, or the negative or grammatical variation thereof or other similar expressions concerning matters that are not historical facts. The forward-looking statements in this Quarterly Report on Form 10-Q are subject to risks that may include, but are not limited to: our limited operating history, including that of ~~our~~ Pure Sunfarms ~~Corp. joint venture for the production of cannabis in Canada (our “Joint Venture”)~~ and our~~start-up~~ operations of growing hemp in the United States; the legal status of ~~our Joint Venture;~~Pure Sunfarms cannabis business; risks relating to obtaining additional financing, including our dependence upon credit facilities; potential difficulties in achieving and/or maintaining profitability; variability of product pricing; risks inherent in the cannabis, hemp and agricultural businesses; the ability of ~~our Joint Venture~~Pure Sunfarms to cultivate and distribute cannabis in Canada; existing and new governmental regulations, including risks related to regulatory compliance and licenses (e.g., ~~our Joint Venture’s~~Pure Sunfarms ability to obtain licenses for its Delta 2 greenhouse facility as well as additional licenses under the Canadian act respecting cannabis to amend to the Controlled Drugs and Substances Act, the Criminal Code and other Acts, S.C. 2018, c. 16 (Canada) for its Delta 3 greenhouse facility), and changes in our regulatory requirements; risks relating to conversion of our greenhouses to cannabis production for ~~our Joint Venture;~~Pure Sunfarms; risks related to rules and regulations at the U.S. federal (Food and Drug Administration and United States Department of Agriculture), state and municipal levels with respect to produce and hemp; retail consolidation, technological advances and other forms of competition; transportation disruptions; product liability and other potential litigation; retention of key executives; labor issues; uninsured and underinsured losses; vulnerability to rising energy costs; environmental, health and safety risks, foreign exchange exposure, risks associated with cross-border trade; difficulties in managing our growth; restrictive covenants under our credit facilities; natural catastrophes; the ongoing and developing COVID-19 pandemic; and tax risks.

The Company has based these forward-looking statements on factors and assumptions about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. Although the forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon assumptions that management believes are reasonable based on information currently available to management, there can be no assurance that actual results will be consistent with these forward-looking statements. Forward-looking statements necessarily involve known and unknown risks and uncertainties, many of which are beyond the Company’s control, that may cause the Company’s or the industry’s actual results, performance, achievements, prospects and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, the factors contained in the Company’s filings with securities regulators, including this Quarterly Report on Form 10-Q. In particular, we caution you that our forward-looking statements are subject to the ongoing and developing circumstances related to the COVID-19 pandemic, which may have a material adverse effect on our business, operations and future financial results.

When relying on forward-looking statements to make decisions, the Company cautions readers not to place undue reliance on these statements, as forward-looking statements involve significant risks and uncertainties and should not be read as guarantees of future results, performance, achievements, prospects and opportunities. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events or information as of the date on which the statements are made in this Quarterly Report on Form 10-Q. Except as required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.

Village Farms International, Inc.

Condensed Consolidated Interim Statements of Financial Position

(In thousands of United States dollars, except share data)

(Unaudited)

	March 31, 2021		December 31, 2020
ASSETS
Current assets
Cash and cash equivalents	$	131,696	$	21,640
Restricted cash		4,091		4,039
Trade receivables		33,470		23,222
Inventories		46,851		46,599
Other receivables		181		145
Income tax receivable		18		18
Prepaid expenses and deposits		7,806		6,145
Total current assets		224,113		101,808
Non-current assets
Property, plant and equipment		192,583		187,020
Investment in minority interests		1,726		1,226
Note receivable - joint venture		3,423		3,545
Goodwill		24,314		24,027
Intangibles		17,317		17,311
Deferred tax asset		13,711		13,312
Operating right-of-use assets		3,549		3,797
Finance right-of-use assets		—		35
Other assets		1,830		1,950
Total assets	$	482,566	$	354,031
LIABILITIES
Current liabilities
Line of credit	$	—	$	2,000
Trade payables		20,785		15,064
Current maturities of long-term debt		10,434		10,166
Note payable		—		15,314
Accrued liabilities		21,077		22,438
Operating lease liabilities - current		1,137		1,107
Finance lease liabilities - current		21		27
Income tax payable		2,827		4,523
Other current liabilities		2,409		1,641
Total current liabilities		58,690		72,280
Non-current liabilities
Long-term debt		55,869		53,913
Deferred tax liability		16,793		18,059
Operating lease liabilities - non-current		2,554		2,855
Finance lease liabilities - non-current		4		8
Other liabilities		1,769		1,633
Total liabilities		135,679		148,748
Commitments and contingencies (note 17)
SHAREHOLDERS’ EQUITY
Common stock, no par value per share - unlimited shares authorized; 81,191,191 shares issued and outstanding at March 31, 2021 and 66,911,811 shares issued and outstanding at December 31, 2020.		301,092		145,668
Additional paid in capital		9,353		17,502
Accumulated other comprehensive income		7,966		6,255
Retained earnings		28,476		35,858
Total shareholders’ equity		346,887		205,283
Total liabilities and shareholders’ equity	$	482,566	$	354,031

   June 30, 2020 December 31, 2019
ASSETS

Current assets

Cash and cash equivalents
   $ 9,568 $ 11,989
Trade receivables
   13,912 8,997
Inventories
   13,123 15,918
Amounts due from joint ventures
   10,661 15,418
Other receivables
   589 342
Income tax receivable
   841 713
Prepaid expenses and deposits
   1,136 1,259


Total current assets
   49,830 54,636


Non-current assets

Property, plant and equipment
   60,498 63,158
Investment in joint ventures
   61,721 41,334
Notes receivable - joint ventures
   10,841 10,865
Deferred tax asset
   8,885 7,999
Right-of-use assets
   4,387 3,582
Other assets
   1,779 1,834


Total assets
   $ 197,941 $ 183,408


LIABILITIES

Current liabilities

Line of credit
   $ 4,000 $ 2,000
Trade payables
   9,849 12,653
Current maturities of long-term debt
   2,377 3,423
Accrued liabilities
   7,037 3,017
Operating lease liabilities - current
   1,741 875
Finance lease liabilities - current
   40 61


Total current liabilities
   25,044 22,029


Non-current liabilities

Long-term debt
   28,354 28,966
Deferred tax liability
   1,728 1,873
Operating lease liabilities - non-current
   2,746 2,690
Finance lease liabilities - non-current
   16 34
Other liabilities
   1,322 1,357


Total liabilities
   59,210 56,949


Commitments and contingencies (note 15)

SHAREHOLDERS’ EQUITY

Common stock, no par value per share - unlimited shares authorized; 56,402,418 shares issued and outstanding at June 30, 2020 and 52,656,669 shares issued and outstanding at December 31, 2019.
   105,829 98,333
Additional paid in capital
   5,128 4,351
Accumulated other comprehensive loss
   (547 ) (475 )
Retained earnings
   28,321 24,250


Total shareholders’ equity
   138,731 126,459


Total liabilities and shareholders’ equity
   $ 197,941 $ 183,408

The accompanying notes are an integral part of these Condensed Consolidated Interim Statements of Financial Position.

Village Farms International, Inc.

Condensed Consolidated Interim Statements of Income (Loss) and Comprehensive Income (Loss)

(In thousands of United States dollars, except per share ~~data, unless otherwise noted)~~data)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019			Three Months Ended March 31,
													2021			2020
Sales	$	47,573		$	41,329		$	79,685		$	73,219		$	52,396		$	32,112
Cost of sales		(44,044	)		(44,299	)		(75,391	)		(75,514	)		(50,089	)		(31,347	)

Gross margin		3,529			(2,970	)		4,294			(2,295	)		2,307			765
Selling, general and administrative expenses		(3,813	)		(3,949	)		(7,734	)		(8,188	)		(8,092	)		(3,921	)
Share-based compensation		(328	)		(701	)		(857	)		(1,997	)		(1,998	)		(529	)
Interest expense		(437	)		(669	)		(974	)		(1,363	)		(741	)		(537	)
Interest income		93			211			476			347			3			383
Foreign exchange gain (loss)		530			243			(396	)		521
Gain on settlement agreement (note 7)		—			—			4,681			—
Other income		26			282			65			152
(Loss) gain on disposal of assets		—			—			(6	)		13,564

(Loss) income before taxes and earnings from unconsolidated entities		(400	)		(7,553	)		(451	)		741
(Provision for) recovery of income taxes		(69	)		3,284			943			(1,152	)

Loss (income) from consolidated entities after income taxes		(469	)		(4,269	)		492			(411	)
Equity earnings from unconsolidated entities		350			7,985			3,579			10,593

Foreign exchange loss														(504	)		(926	)
Gain on settlement agreement														—			4,681
Other (expense) income														(69	)		39
Loss on disposal of assets														—			(6	)
Loss before taxes and earnings of unconsolidated entities														(9,094	)		(51	)
Recovery of income taxes														1,839			1,012
(Loss) income from consolidated entities after income taxes														(7,255	)		961
Equity (losses) earnings from unconsolidated entities														(127	)		3,229
Net (loss) income	$	(119	)	$	3,716		$	4,071		$	10,182		$	(7,382	)	$	4,190


Basic (loss) income per share	$	(0.00	)	$	0.08		$	0.07		$	0.21		$	(0.10	)	$	0.08

Diluted (loss) income per share	$	(0.00	)	$	0.07		$	0.07		$	0.20		$	(0.10	)	$	0.08


Weighted average number of common shares used in the computation of net (loss) income per share (in thousands):

Basic		56,339			48,825			54,636			48,322			76,022			52,933

Diluted		56,339			50,712			55,756			50,159			76,022			54,175


Net (loss) income	$	(119	)	$	3,716		$	4,071		$	10,182		$	(7,382	)	$	4,190
Other comprehensive (loss) income:
Foreign currency translation adjustment		55			36			(72	)		80			1,711			(127	)

Comprehensive (loss) income	$	(64	)	$	3,752		$	3,999		$	10,262		$	(5,671	)	$	4,063

The accompanying notes are an integral part of these Condensed Consolidated Interim Statements of Income (Loss) and Comprehensive Income (Loss).

Village Farms International, Inc.

Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity

(In thousands of United States dollars, except for shares outstanding)

(Unaudited)

																		Three Months Ended March 31, 2021
	Three Months Ended June 30, 2020																	Number of Common Shares (in thousands)		Common Stock		Additional Paid in Capital			Accumulated Other Comprehensive (Loss) Income		Retained Earnings			Total Shareholders’ Equity
	Number of Common Shares		Common Stock			Additional paid in capital			Accumulated Other Comprehensive (Loss) Income			Retained Earnings			Total Shareholders’ Equity
Balance at April 1, 2020		56,250,419	$	105,656		$	4,880		$	(602	)	$	28,440		$	138,374
Shares issued in pubic offering, net of issuance costs		—		(29	)		—			—			—			(29	)
Balance at January 1, 2021																			66,912	$	145,668	$	17,502		$	6,255	$	35,858		$	205,283
Shares issued in public offering, net of issuance costs																			10,887		127,489		—			—		—			127,489
Shares issued on exercise of warrants																			3,045		27,743		(10,080	)		—		—			17,663
Shares issued on exercise of stock options		151,999		202			(80	)		—			—			122			104		192		(67	)		—		—			125
Share-based compensation		—		—			328			—			—			328			243		—		1,998			—		—			1,998
Cumulative translation adjustment		—		—			—			55			—			55			—		—		—			1,711		—			1,711
Net loss		—		—			—			—			(119	)		(119	)		—		—		—			—		(7,382	)		(7,382	)

Balance at June 30, 2020		56,402,418	$	105,829		$	5,128		$	(547	)	$	28,321		$	138,731

Balance at March 31, 2021																			81,191	$	301,092	$	9,353		$	7,966	$	28,476		$	346,887

   Three Months Ended June 30, 2019
   Number of
Common
Shares    Common
Stock    Additional paid
in capital Accumulated Other
Comprehensive
(Loss) Income Retained
Earnings    Total
Shareholders’
Equity
Balance at April 1, 2019
   47,812,003    $ 61,832    $ 2,568 $ (518 ) $ 28,391    $ 92,273
Shares issued in pubic offering, net of issuance costs
   1,000,000    13,928    —   —   —      13,928
Shares issued on exercise of stock options
   36,783    61    (20 ) —   —      41
Share-based compensation
   125,000    —      701 —   —      701
Shares issued on exercise of warrants
   300,000    614    (148 ) —   —      466
Cumulative translation adjustment
   —      —      —   36 —      36
Net income
   —      —      —   —   3,716    3,716








Balance at June 30, 2019
   49,273,786    $ 76,435    $ 3,101 $ (482 ) $ 32,107    $ 111,161


	Six Months Ended June 30, 2020															Three Months Ended March 31, 2020
	Number of Common Shares		Common Stock		Additional paid in capital			Accumulated Other Comprehensive (Loss) Income			Retained Earnings		Total Shareholders’ Equity			Number of Common Shares (in thousands)		Common Stock		Additional Paid in Capital		Accumulated Other Comprehensive Loss			Retained Earnings		Total Shareholders’ Equity
Balance at January 1, 2020		52,656,669	$	98,333	$	4,351		$	(475	)	$	24,250	$	126,459			52,657	$	98,333	$	4,351	$	(475	)	$	24,250	$	126,459
Shares issued in pubic offering, net of issuance costs		3,593,750		7,294		—			—			—		7,294
Shares issued on exercise of stock options		151,999		202		(80	)		—			—		122
Shares issued in public offering, net of issuance costs																	3,594		7,323		—		—			—		7,323
Share-based compensation		—		—		857			—			—		857			—		—		529		—			—		529
Cumulative translation adjustment		—		—		—			(72	)		—		(72	)		—		—		—		(127	)		—		(127	)
Net income		—		—		—			—			4,071		4,071			—		—		—		—			4,190		4,190

Balance at June 30, 2020		56,402,418	$	105,829	$	5,128		$	(547	)	$	28,321	$	138,731

Balance at March 31, 2020																	56,251	$	105,656	$	4,880	$	(602	)	$	28,440	$	138,374

   Six Months Ended June 30, 2019
   Number of
Common
Shares    Common
Stock    Additional paid
in capital Accumulated Other
Comprehensive
(Loss) Income Retained
Earnings    Total
Shareholders’
Equity
Balance at January 1, 2019
   47,642,672    $ 60,872    $ 2,198 $ (562 ) $ 21,925    $ 84,433
Shares issued in pubic offering, net of issuance costs
   1,000,000    13,928    —   —   —      13,928
Shares issued on exercise of stock options
   52,782    113    (38 ) —   —      75
Share-based compensation
   278,332    908    1,089 —   —      1,997
Shares issued on exercise of warrants
   300,000    614    (148 ) —   —      466
Cumulative translation adjustment
   —      —      —   80 —      80
Net income
   —      —      —   —   10,182    10,182








Balance at June 30, 2019
   49,273,786    $ 76,435    $ 3,101 $ (482 ) $ 32,107    $ 111,161

The accompanying notes are an integral part of these Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity.

Village Farms International, Inc.

Condensed Consolidated Interim Statements of Cash Flows

(In thousands of United States dollars)

(Unaudited)


	Six Months Ended June 30,						Three Months Ended March 31,
	2020			2019			2021			2020
Cash flows used in operating activities:
Net income	$	4,071		$	10,182
Adjustments to reconcile net income to net cash provided by operating activities:
Net (loss) income							$	(7,382	)	$	4,190
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		3,021			3,766			3,225			1,530
Amortization of deferred charges		38			38			78			19
Share of income from joint ventures		(3,579	)		(10,593	)
Share of loss (income) from joint ventures								127			(3,229	)
Interest expense		974			1,363			741			537
Interest income		(476	)		(347	)		(3	)		(383	)
Interest paid on long-term debt		(1,018	)		(1,063	)		(851	)		(538	)
Gain on settlement agreement		(4,681	)		—			—			(4,681	)
Loss (gain) on disposal of assets		6			(13,564	)
Loss on disposal of assets								—			6
Non-cash lease expense		(627	)		(513	)		(128	)		(271	)
Interest paid on finance leases		(2	)		(4	)
Interest paid on finance lease								—			(1	)
Share-based compensation		857			1,997			1,998			529
Deferred income taxes		(400	)		1,144			(2,538	)		(468	)
Changes in non-cash working capital items		3,961			(1,843	)		(9,703	)		2,225

Net cash provided by (used) in operating activities		2,145			(9,437	)


Net cash used in operating activities								(14,436	)		(535	)
Cash flows used in investing activities:
Purchases of property, plant and equipment, net of rebate		(452	)		(730	)
Purchases of property, plant and equipment								(4,706	)		(259	)
Advances to joint ventures		(125	)		(5,806	)		(5	)		—
Proceeds from sale of asset		—			60
Investment in joint ventures		(11,713	)		(13	)		—			(6,063	)

Investment in minority interests								(500	)		—
Net cash used in investing activities		(12,290	)		(6,489	)		(5,211	)		(6,322	)


Cash flows from financing activities:
Cash flows provided by financing activities:
Proceeds from borrowings		3,000			3,000			4,176			2,000
Repayments on borrowings		(2,652	)		(1,709	)		(4,223	)		(875	)
Proceeds from issuance of common stock		7,957			13,928
Proceeds from issuance of common stock and warrants								135,000			7,957
Issuance costs		(663	)		—			(7,511	)		(633	)
Proceeds from exercise of stock options		122			75			125			—
Proceeds from exercise of warrants								17,663			—
Payments on capital lease obligations		(39	)		(48	)		(155	)		(21	)
Proceeds from exercise of warrants		—			466

Payment of note payable related to acquisition								(15,498	)		—
Net cash provided by financing activities		7,725			15,712			129,577			8,428


Effect of exchange rate changes on cash and cash equivalents		(1	)		—			178			(2	)


Net decrease in cash and cash equivalents		(2,421	)		(214	)
Net increase in cash and cash equivalents								110,108			1,569
Cash and cash equivalents, beginning of period		11,989			11,920			25,679			11,989

Cash and cash equivalents, end of period	$	9,568		$	11,706		$	135,787		$	13,558

The accompanying notes are an integral part of these Condensed Consolidated Interim Statements of Cash Flows.

VILLAGE FARMS INTERNATIONAL, INC.

Notes to Condensed Consolidated Interim Financial Statements

(In thousands of United States dollars, except per share amounts, unless otherwise noted)

1	NATURE OF OPERATIONS

Village Farms International, Inc. (“VFF” ~~the parent company,~~) and together with its subsidiaries ~~the~~(the “Company”, “we”, “us”, or “our”) is incorporated under the Canada Business Corporation Act. VFF’s principal operating subsidiaries as of ~~June 30, 2020~~March 31, 2021 are Village Farms Canada Limited Partnership (“VFCLP”), Village Farms, L.P. (“VFLP”), ~~and~~ VF Clean Energy, Inc. (“VFCE”), and Pure Sunfarms Corp. (“Pure Sunfarms” or “PSF”). The address of the registered office of VFF is 4700 80th Street, Delta, British Columbia, Canada, V4K 3N3. VFF owns a 65% equity interest in Village Fields Hemp USA LLC (“VF Hemp”) ~~and a 58.7% equity interest in Pure Sunfarms Corp. (“Pure Sunfarms”)~~, ~~both of~~ which ~~are~~is recorded as ~~Investments in Joint Ventures~~an equity investment (note 7)9).

The Company’s shares are listed on both the Toronto Stock Exchange ~~under the symbol VFF~~ and ~~are also listed in the United States on the~~ Nasdaq Capital Market (“Nasdaq”), in each case, under the symbol ~~VFF.~~“VFF”.

The Company owns and operates sophisticated, highly intensive agricultural greenhouse facilities in British Columbia and Texas, where it produces, markets and sells premium-quality tomatoes, bell peppers, and cucumbers. The Company, through ~~its subsidiary VFCE, owns and operates a 7.0 MW power plant that generates electricity. The Company’s joint venture,~~ Pure Sunfarms, is a licensed producer and supplier of cannabis products to be sold to other licensed providers and provincial governments across Canada and internationally. The ~~Company’s joint ventures,~~Company, through its subsidiary VFCE, owns and operates a 7.0 MW power plant that generates electricity. VF Hemp ~~and AVGG Hemp, are cultivators~~cultivated one crop season of high cannabidiol (“CBD”) hemp in multiple states throughout the United ~~States.~~

~~Coronavirus pandemic~~ ~~(“COVID-19”)~~

~~In March 2020, the World Health Organization declared the outbreak of the~~ ~~COVID-19~~ virus a global pandemic. This outbreak continues to cause major disruptions to businesses and markets worldwide as the virus continues to spread. A number of countries as well as certain states and cities within the United States ~~and Canada have enacted temporary closures of businesses, issued quarantine or~~ ~~shelter-in-place~~ ~~orders and taken other restrictive measures~~ in ~~response to~~ ~~COVID-19.~~2017.

~~To date, all of the Company’s operations are operating normally, however, the extent to which~~ ~~COVID-19~~ and the related global economic crisis affect the Company’s business, results of operations and financial condition, will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any recovery period, future actions taken by governmental authorities, central banks and other third parties (including new financial regulation and other regulatory reform) in response to the pandemic, and the effects on our produce, clients, vendors and employees. Village Farms continues to service its customers amid uncertainty and disruption linked to ~~COVID-19~~ ~~and is actively managing its business to respond to the impact.~~

2	BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Interim Financial Statements for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for fair presentation have been included. Operating results for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 are subject to seasonal variations and accordingly are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2020.~~2021. For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal years ended December 31, ~~2019~~2020 and ~~2018.~~

Other than as described below, there were no changes to our significant accounting policies described in our annual financial statements that had a material impact on our financial statements and related notes.

~~VILLAGE FARMS INTERNATIONAL, INC.~~

~~Notes to Condensed Consolidated Interim Financial Statements~~

~~(In thousands of United States dollars, except per share amounts, unless otherwise noted)~~2019.

3	NEW ACCOUNTING PRONOUNCEMENTS ~~ADOPTED~~

In ~~August 2018,~~March 2020, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2018-13,~~ “~~Fair Value Measurement~~2020-04, Reference Rate Reform (Topic ~~820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement~~~~.” ASU~~ ~~2018-13~~ removes the disclosure requirement for the amount and reasons for transfers between Level 1 and Level 2 fair value measurements as well as the process for Level 3 fair value measurements. In addition, the ASU adds the disclosure requirements for changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end848): Facilitation of the ~~reporting period~~Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to debt instruments, derivatives, and other contracts that reference LIBOR or other reference rates expected to be discontinued as ~~well as the range~~a result of reference rate reform. This guidance is optional and ~~weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.~~may be elected through December 31, 2022 using a prospective application on all eligible contract modifications. The Company ~~adopted ASU~~ ~~2018-13~~ ~~on January 1, 2020. The adoption~~has a line of ~~this standard did not~~credit that incorporates LIBOR as a referenced interest rate. It is difficult to predict what effect, if any, the phase-out of LIBOR and the use of alternative benchmarks may have ~~a material impact~~ on the Company’s ~~consolidated~~business or on the overall financial ~~statements and related disclosures.~~

~~In June 2016, the FASB issued ASU~~ ~~2016-13,~~ “~~Financial Instruments—Credit Losses~~.”markets. The standard, including subsequently issued amendments, requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectabilityCompany has not adopted any of the ~~reported amount. The Company adopted ASU~~ ~~2016-13~~ ~~on January 1, 2020. The~~optional expedients or exceptions through March 31, 2021 but will continue to evaluate the possible adoption of ~~this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.~~any such expedients or exceptions.

4	~~INVENTORIES~~

Inventories, consisting of crop inventory, purchased produce inventory and spare parts inventory are valued at the lower of cost or net realizable value. Cost is determined using the weighted average cost method. Costs included in crop inventory include but are not limited to raw material, 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 sold.6

~~Inventories consisted of the following as of June 30, 2020 and December 31, 2019:~~

Classification    June 30, 2020    December 31, 2019
Crop inventory
   $ 12,103    $ 15,281
Purchased produce inventory
   916    530
Spare parts inventory
   104    107




Inventories
   $ 13,123    $ 15,918

5	~~PROPERTY, PLANT AND EQUIPMENT~~

Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is allocated between cost of sales and selling, general and administrative expenses depending on the type of asset and is determined using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the remaining life of the lease or useful life of the asset, whichever is shorter. Maintenance and repairs are charged to cost of sales when incurred. Significant expenditures, which extend the useful lives of assets, are capitalized. Land is not depreciated. The estimated useful lives of the class of assets for the current and comparative periods are as follows:


~~Classification~~		~~Estimated Useful Lives~~
~~Leasehold and land improvements~~		~~5-20~~ ~~years~~
~~Greenhouses and other buildings~~		~~4-30~~ ~~years~~
~~Greenhouse equipment~~		~~3-30~~ ~~years~~
~~Machinery and equipment~~		~~3-12~~ ~~years~~

VILLAGE FARMS INTERNATIONAL, INC.

Notes to Condensed Consolidated Interim Financial Statements

(In thousands of United States dollars, except per share amounts, unless otherwise noted)

~~Construction in process reflects~~

4	INVENTORIES

Inventories consisted of the ~~cost of assets under construction, which are not depreciated until placed into service.~~following as of:

Classification	March 31, 2021		December 31, 2020
Cannabis:
Available for sale - flower and trim	$	13,785	$	12,720
Distilled oil		14,288		13,511
Capitalized production costs		1,108		3,438
Other		2,436		2,552
Produce and Energy:
Crop inventory		14,454		13,441
Purchased produce inventory		650		810
Spare parts inventory		130		127
Inventory	$	46,851	$	46,599

5	PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

Classification	March 31, 2021			December 31, 2020
Land	$	10,534		$	10,447
Leasehold and land improvements		4,158			4,154
Buildings		143,163			142,060
Machinery and equipment		70,080			69,390
Construction in progress		59,773			52,960
Less: Accumulated depreciation		(95,125	)		(91,991	)
Property, plant and equipment, net	$	192,583		$	187,020

6	INTANGIBLES

Intangibles consisted of the following as ~~of June 30, 2020 and December 31, 2019:~~of:

Classification
   June 30, 2020    December 31, 2019
Land
   $ 3,204    $ 3,204
Leasehold and land improvements
   3,820    3,820
Greenhouses and other buildings
   72,870    72,772
Machinery and equipment
   61,841    61,871
Construction in progress
   1,787    1,697
Less: Accumulated depreciation
   (83,024 )    (80,206 )




Property, plant and equipment
   $ 60,498    $ 63,158

Classification	March 31, 2021			December 31, 2020
Licenses	$	13,023		$	12,870
Branding		3,733			3,688
Computer Software		956			945
Less: Accumulated amortization		(395	)		(192	)
Intangibles, net	$	17,317		$	17,311

6	~~LEASES~~

On August 7, 2019, the Company entered into an operating lease agreement for office space located in Lake Mary, Florida. The lease commenced on January 1, 2020 and has a lease term of 88 months with an option to extend for five years. The base rent for the lease will be adjusted annually by multiplying the base rent by 1.025. The initial lease liability was calculated as the present value of the lease payments using an incremental borrowing rate of 4.98%. The ~~right-of-use~~ asset was calculated as the initial amount of the lease liability, plus any lease payments made before lease commencement, plus initial direct costs, less any lease incentives. The lease liability and the ~~right-of-use~~ ~~asset are recorded in the consolidated statements of financial position~~.

~~The components of lease related expenses are as follows:~~

   Three months ended June 30,    Six months ended June 30,
   2020    2019    2020    2019
Operating lease expense ^(a)
   $ 508    $ 563    $ 1,116    $ 1,174








Finance lease expense:

Amortization of right-of-use assets
   $ 18    $ 20    $ 39    $ 40
Interest on lease liabilities
   1    2    2    5








Total finance lease expense
   $ 19    $ 22    $ 41    $ 45

^(a)	~~Includes short-term lease costs of $302 and $317 for the three months ended June 30, 2020 and 2019, and $502 and $628 for the six months ended June 30, 2020 and 2019, respectively.~~

~~Cash paid for amounts included in the measurement of lease liabilities:~~

   Three months ended June 30,    Six months ended June 30,
   2020    2019    2020    2019
Operating cash flows from operating leases
   $ 356    $ 259    $ 627    $ 513
Operating cash flows from finance leases
   $ 1    $ 1    $ 2    $ 4
Finance cash flows from finance leases
   $ 18    $ 30    $ 39    $ 48

~~VILLAGE FARMS INTERNATIONAL, INC.~~

~~Notes to Condensed Consolidated Interim Financial Statements~~

~~(In thousands of United States dollars, except per share amounts, unless otherwise noted)~~


	~~June 30, 2020~~
~~Weighted average remaining lease term:~~
~~Operating leases~~		~~4.6~~
~~Finance leases~~		~~1.5~~

~~Weighted average discount rate:~~
~~Operating leases~~		~~5.78~~	%
~~Finance leases~~		~~6.25~~	%

~~Maturities of lease liabilities are as follows:~~

   Operating
leases    Finance
leases
Remainder of 2020
   $ 630    $ 23
2021
   1,305    30
2022
   1,090    9
2023
   870    —
2024
   512    —
Thereafter
   691    —




Undiscounted lease cash flow commitments
   5,098    62
Reconciling impact from discounting
   (611 )    (6 )




Lease liabilities on consolidated statement of financial position as of June 30, 2020
   $ 4,487    $ 56

7	~~INVESTMENT IN JOINT VENTURES~~

~~Summarized Equity Earnings (Losses) from Unconsolidated Entities~~

   Three months ended June 30,    Six months ended June 30,
   2020    2019    2020    2019
Pure Sunfarms
   $ 463    $ 8,105    $ 3,994    $ 10,747
VF Hemp
   (113 )    (104 )    (415 )    (133 )
AVGG Hemp
   —      (16 )    —      (21 )








Total
   $ 350    $ 7,985    $ 3,579    $ 10,593

~~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.

The Company accounts for its investment in Pure Sunfarms, in accordance with Accounting Standards Codification (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 58.7% majority ownership interest, 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 June 30, 2020 relates primarily to the Company’s investment of $61,721 and the recovery of the outstanding loan to Pure Sunfarms of $10,661.

The Company is required to apply the hypothetical liquidation at book value (“HLBV”) method to determine its allocation of the profits and losses in Pure Sunfarms. When determining its allocation of profits and losses, the HLBV method only considers shares that have been fully paid for. Therefore, due to the monthly escrow payments made by Emerald in 2019 in accordance with the Delta 2 Option and Escrow Agreements, the ownership changed each month in 2019 as escrow payment(s) were made.

VILLAGE FARMS INTERNATIONAL, INC.

Notes to Condensed Consolidated Interim Financial Statements

(In thousands of United States dollars, except per share amounts, unless otherwise noted)

~~Under the hypothetical liquidation method, the Company received 58.7% and 62.3%~~

The expected future amortization expense for definite-lived intangible assets as of Pure Sunfarms’ earnings for the three months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019, the Company received 57.5% and 61.7% of Pure Sunfarms’ earnings, respectively.

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~~2021 was 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.~~ follows:

Fiscal period
Remainder of 2021	$	590
2022		786
2023		780
2024		780
2025		688
Thereafter		9,960
Intangibles, net	$	13,584

LEASES

The Company ~~recognized~~leases a ~~gain~~parcel of ~~$13.6 million~~land in Marfa, Texas that one of its greenhouses resides on ~~the contribution of the fixed assets.~~

~~On March 2, 2020, pursuant to the settlement agreement with Emerald (the “Settlement Agreement”), Emerald transferred to the Company 2.5% of additional equity~~as well as two distribution centers located in ~~Pure Sunfarms.~~Fort Worth, Texas and Surrey, British Columbia. The Company ~~determined the fair value of the equity received from Emerald to be CA$6.5 million (US$4.7 million).~~leases production-related equipment at its greenhouses in Texas and British Columbia. The Company ~~recorded this amount as a gain on settlement agreement~~also leases an office building located in ~~the condensed consolidated statement of income (loss) and comprehensive income (loss)~~Lake Mary, Florida for ~~the six months ended June 30, 2020.~~

As of June 30, 2020, and December 31, 2019, the total investment in Pure Sunfarms of $61.7 million and $41.3 million, respectively, was recorded in the consolidated statements of financial position.its corporate headquarters.

The ~~Company’s share~~components of ~~the joint venture consists of the following:~~lease related expenses are as follows:

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

	Three months ended March 31,
	2021		2020
Operating lease expense ^(a)	$	622	$	608
Finance lease expense:
Amortization of right-of-use assets	$	11	$	21
Interest on lease liabilities		—		1
Total finance lease expense	$	11	$	22

Balance, January 1, 2020
   $ 41,334
Investments in joint venture
   16,393
Share of net income for the period
   3,994


Balance, June 30, 2020
   $ 61,721

~~Summarized financial information of Pure Sunfarms:~~

   June 30, 2020    December 31, 2019
Current assets

Cash and cash equivalents
   $ 6,472    $ 7,356
Trade receivables
   10,934    8,687
Inventory
   36,000    21,745
Other current assets
   5,950    6,964
Non-current assets
   112,167    108,652
Current liabilities

Trade payables
   (10,291 )    (4,938 )
Borrowings due to joint ventures
   (10,703 )    (26,413 )
Income taxes payable
   —      (8,489 )
Borrowings – current
   (1,798 )    (1,423 )
Other current liabilities
   (8,765 )    (5,021 )
Non-current liabilities

Borrowings – long term
   (20,431 )    (13,089 )
Deferred tax liabilities
   (13,068 )    (2,473 )




Net assets
   $ 106,467    $ 91,558




Reconciliation of net assets:

Accumulated retained earnings
   $ 33,635    $ 26,679
Contributions from joint venture partners
   75,738    63,481
Currency translation adjustment
   (2,906 )    1,398




Net assets
   $ 106,467    91,558

~~VILLAGE FARMS INTERNATIONAL, INC.~~

~~Notes to Condensed Consolidated Interim Financial Statements~~

~~(In thousands of United States dollars, except per share amounts, unless otherwise noted)~~

   Three months ended June 30,    Six months ended June 30,
   2020    2019    2020    2019
Revenue
   $ 9,386    $ 24,244    $ 22,523    $ 35,045
Cost of sales*
   (6,266 )    (3,956 )    (12,524 )    (7,774 )








Gross Margin
   3,120    20,288    9,999    27,271
Selling, general and administrative expenses
   (1,850 )    (1,786 )    (4,284 )    (2,785 )








Income from operations
   1,270    18,502    5,715    24,486
Interest expense
   (131 )    (293 )    (348 )    (293 )
Foreign exchange (loss) gain
   28    (25 )    (151 )    14
Other income, net**
   1    4    4,333    13








Income before taxes
   1,168    18,188    9,549    24,220
Provision for income taxes
   (379 )    (5,169 )    (2,595 )    (6,798 )








Net Income
   $ 789    $ 13,019    $ 6,954    $ 17,422

^(a)

~~Included in cost~~Includes short-term lease costs of ~~sales~~$148 and $200 for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019 is $563 and $387, and six months ended June 30, 2020 and 2019 is $1,012 and $845 respectively, of depreciation expense.~~respectively.

**	~~Includes gain recognized on settlement of net liabilities of $4,348.~~

~~Village Fields Hemp USA LLC~~

~~On February 27, 2019,~~Cash paid for amounts included in the ~~Company entered into a joint venture with Nature Crisp, LLC (“Nature Crisp”) to form VF Hemp for the objective~~measurement 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 Joint Venture Agreement, the Company will 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 because the Company is able to exercise significant influence over the operating and financial policies of VF Hemp through its 65% ownership interest and joint power arrangement with Nature Crisp. The Company’s maximum exposure to loss as a result of its involvement with VF Hemp is directly related to the recovery of the $10,841 loan outstanding to VF Hemp.

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

	Three months ended March 31,
	2021		2020
Operating cash flows from operating leases	$	128	$	271
Operating cash flows from finance leases	$	-	$	1
Finance cash flows from finance leases	$	155	$	21

	March 31, 2021
~~Balance, beginning of the period~~Weighted average remaining lease term:	$	—
~~Investments in joint venture~~		7
~~Share of net loss~~		~~(2,464~~	)
~~Losses applied against joint venture note receivable~~		~~2,457~~

~~Balance, December 31, 2019~~Operating leases	$	—

4.1
~~Balance, beginning of the period~~Finance leases	$	—
~~Investments in joint venture~~		—
~~Share of net loss~~		~~(415~~	)
~~Losses applied against joint venture note receivable~~		~~415~~
			1.1
~~Balance, June 30, 2020~~Weighted average discount rate:	$	—

Operating leases		5.73		%
Finance leases		6.25		%

VILLAGE FARMS INTERNATIONAL, INC.

Notes to Condensed Consolidated Interim Financial Statements

(In thousands of United States dollars, except per share amounts, unless otherwise noted)

~~Summarized financial information~~

Maturities of ~~VF Hemp:~~lease liabilities are as follows:

   June 30, 2020    December 31, 2019
Current assets

Inventory
   $ 9,268    $ 9,308
Other current assets
   314    546
Non-current assets
   1,336    1,476
Current liabilities
   (1,642 )    (1,788 )
Non-current liabilities
   (13,697 )    (13,323 )




Net assets
   $ (4,421 )    $ (3,781 )




Reconciliation of net assets:

Accumulated retained earnings
   $ (3,791 )    $ (3,791 )
Net loss for the six months ended June 30, 2020
   (640 )    —
Contributions from joint venture partners
   10    10




Net assets
   $ (4,421 )    $ (3,781 )

	Operating leases			Finance leases
Remainder of 2021	$	980		$	18
2022		1,090			9
2023		870			—
2024		512			—
2025		258
Thereafter		433			—
Undiscounted lease cash flow commitments		4,143			27
Reconciling impact from discounting		(452	)		(2	)
Lease liabilities on consolidated statement of financial position as of March 31, 2021	$	3,691		$	25

8	~~DEBT~~PURE SUNFARMS ACQUISITION

~~At June 30,~~On November 2, 2020, ~~the Company had~~Village Farms consummated a ~~Term Loan financing~~definitive purchase and sale agreement with ~~a Canadian creditor~~Emerald Health Therapeutics Inc. (“~~FCC Loan”~~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 ~~non-revolving~~ ~~variable rate term loan has~~shares were acquired for a ~~maturity date~~total purchase price of ~~April 1, 2025~~C$79.9 million (US$60.0 million), satisfied through an initial C$60.0 million (US$45.0 million) cash payment and a ~~balance of $29,766 as of June 30, 2020. The outstanding balance is repayable by way of monthly installments of principal and interest, with the balance and any accrued interest~~C$19.9 million (US$15.0 million) secured promissory note that was payable to ~~be paid~~Emerald, which promissory note was repaid in full on April 1, 2025. Effective August 1, 2020, monthly principal payments are reduced to $164 from $257. As of June 30, 2020, and December 31, 2019, borrowings under the FCC Loan agreement were subject to an interest rate of 4.68% and 6.391%, respectively.February 8, 2021.

The ~~Company’s subsidiary VFCE~~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 850”). ASC Topic 805 requires that the purchase consideration be allocated to the assets acquired and liabilities assumed in a ~~loan agreement with a Canadian Chartered Bank that includes a~~ ~~non-revolving~~ ~~fixed rate loan of CA$3.0 million with a maturity~~business combination based upon their estimated fair values at the date of ~~June 2023~~acquisition. The purchase price has been allocated to the underlying assets acquired and ~~fixed interest rate~~liabilities assumed based upon their estimated fair values at the date of ~~4.98%. As~~acquisition. The Company used information available to make fair value determinations and engaged independent valuation specialists to assist in the fair value determination of ~~June 30, 2020, and December 31, 2019,~~acquired intangible assets. The estimated fair value of licenses was determined using a multi-period excess earnings method. This earnings-based method considers the ~~balance was US$882 and US$1,066, respectively. The loan agreement also includes an uncommitted,~~ ~~non-revolving~~ ~~credit facility for up to CA$300 to cover Letters of Guarantee issued by the bank on behalf~~85 net present value of the Company, with a maximum term of 365 days, renewable annually. The loan agreement also includes an uncommitted credit facility for up to CA$700 to support financing of certain capital expenditures. The Company received an initial advance of CA$250 in October 2017. Each advance is to be repaid on a five-year, straight-line amortization of principal, repaid in monthly installments of principal plus interestlicenses’ cash flows discounted at an ~~interest~~asset specific discount rate. The net present value attributable to the licenses deducts the contributory asset charges used in connection with the licenses. The estimated fair value of the brand was determined using the relief-from-royalty method. This method assumes that the brand has value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires the Company to estimate the future revenues for the related brand, the appropriate royalty rate, and an asset specific discount rate. This measure of ~~CA$ prime rate plus 200 basis points. As~~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 was valued using the replacement cost method, which requires the Company to estimate the costs to construct an asset of ~~June 30, 2020,~~equivalent utility at prices available at the time of the valuation analysis, with adjustments in value for physical deterioration and ~~December 31, 2019,~~functional and economic obsolescence. Upon the ~~balance~~acquisition of Pure Sunfarms, the Company identified goodwill of C$30,618 (US$24,314). This goodwill was ~~US$83 and US$106, respectively.~~

~~The weighted average interest rate on short-term borrowings~~calculated as the difference between the fair value of ~~June 30, 2020 and December 31, 2019 was 4.7% and 6.2%, respectively.~~

~~The Company has a line~~the consideration issued for the acquisition of credit agreement with a Canadian Chartered Bank (“Operating Loan”). The revolving Operating Loan has a line of credit up to CA$13,000, less outstanding letters of credit totaling US$150 and CA$38, and variable interest rates with a maturity date on May 31, 2021. The Operating Loan is subject to margin requirements stipulated by the bank. As of June 30, 2020, and December 31, 2019, the amount drawn on this facility was US$4,000 and US$2,000, respectively.

~~The Company’s borrowings (“Credit Facilities”) are subject to certain positive and negative covenants, including debt ratios,~~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 ~~maintain certain minimum working capital. In December 2019,~~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 ~~received~~also recognized a ~~waiver for its annual debt service coverage and debt~~gain of $23.6 million due to ~~EBITDA covenants under its Term Loan. The Company amended~~ the ~~terms~~revaluation of its ~~covenants with respect~~previously held investment in Pure Sunfarms to its ~~term loan in August, effective June 30, 2020, applicable to its annual fiscal~~fair value at the acquisition date. The initial accounting for the business combination was considered complete for the year ~~end~~ended December 31, 2020. As

The following table shows the allocation of ~~June 30, 2020,~~ the ~~Company was in compliance with all~~purchase price to assets acquired and liabilities assumed, based on estimates of ~~its other Credit Facility covenants under its Credit Facilities.~~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:

Accrued interest payable on the credit facilities and loans as of June 30, 2020 and December 31, 2019 was $111 and $162, respectively, and these amounts are included in accrued liabilities in the interim statements of financial position.9

VILLAGE FARMS INTERNATIONAL, INC.

Notes to Condensed Consolidated Interim Financial Statements

(In thousands of United States dollars, except per share amounts, unless otherwise noted)

~~As collateral~~

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 months ended March 31, 2020, the Company’s equity earnings from Pure Sunfarms were $3,531.

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 ~~FCC Loan,~~three months ended March 31, 2020.

VILLAGE FARMS INTERNATIONAL, INC.

Notes to Condensed Consolidated Interim Financial Statements

(In thousands of United States dollars, except per share amounts, unless otherwise noted)

Summarized financial information of Pure Sunfarms:

	Three months ended			Three months ended
	March 31, 2021			March 31, 2020
Sales	$	17,459		$	13,137
Cost of sales*		(12,322	)		(6,258	)
Gross Margin		5,137			6,879
Selling, general and administrative expenses		(5,119	)		(2,434	)
Income from operations		18			4,445
Interest expense		(372	)		(217	)
Foreign exchange loss		(149	)		(179	)
Other income, net**		(50	)		4,332
Income before taxes		(553	)		8,381
Recovery of (provision for) income taxes		149			(2,216	)
Net income	$	(404	)	$	6,165

Included in cost of sales for the three months ended March 31, 2020 is$449 of depreciation expense.

** Includes gain recognized on settlement of net liabilities of $4,348.

9	INVESTMENT IN JOINT VENTURES AND MINORITY INTERESTS

Village Fields Hemp USA LLC

For the three months ended March 31, 2021 and 2020, the Company’s equity losses from VF Hemp were ($127) and ($302), respectively. The Company’s maximum exposure to loss as a result of its involvement with VF Hemp is directly related to the recovery of the $3,423 loan outstanding to VF Hemp.

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

Balance, January 1, 2020	$	—
Share of net loss		(3,975	)
Losses applied against joint venture note receivable		3,975
Balance, December 31, 2020	$	—
Balance, January 1, 2021	$	—
Share of net loss		(127	)
Losses applied against joint venture note receivable		127
Balance, March 31, 2021	$	—

VILLAGE FARMS INTERNATIONAL, INC.

Notes to Condensed Consolidated Interim Financial Statements

(In thousands of United States dollars, except per share amounts, unless otherwise noted)

Summarized financial information of VF Hemp:

	March 31, 2021			December 31, 2020
Current assets
Inventory	$	4,035		$	4,035
Other current assets		182			302
Non-current assets		885			937
Current liabilities		(1,479	)		(1,472	)
Non-current liabilities		(13,702	)		(13,697	)
Net assets	$	(10,079	)	$	(9,895	)
Reconciliation of net assets:
Accumulated retained earnings	$	(9,895	)	$	(3,791	)
Net loss		(194	)		(6,114	)
Contributions from joint venture partners		10			10
Net assets	$	(10,079	)	$	(9,895	)

In February 2021, the Company ~~has provided promissory notes,~~exercised a ~~first mortgage on the~~ ~~VFF-owned~~ ~~greenhouse properties (excluding the Delta 3 and Delta 2 greenhouse facilities), and general security agreements over~~portion of its ~~assets. In addition, the~~option to make an additional equity investment in Australia-based Altum International Pty Ltd (“Altum”). The Company ~~has provided full recourse guarantees and has granted security therein.~~ exercised 204,000 options at $2.45 per option increasing its ownership to just under 10.0%.

DEBT

	March 31, 2021			December 31, 2020
Term Loan - ("FCC Loan") - repayable by monthly principle of payments of $164 and accrued interest at a rate of 3.766%; matures April 1, 2025	$	28,198		$	28,690
Term Loan - VFCE: CA$3.0M - non-revolving fixed rate loan with fixed interest rate of 4.98%; matures June 2023		730			797
Advance on term loan - VFCE: CA$250 - repayable in monthly installments of principle plus interest rate of CA$ prime rate plus 200 basis points		60			69
Term Loan - Pure Sunfarms - CA$19.0M - Canadian prime interest rate plus an applicable margin, repayable in quarterly payments equal to 2.50% of the outstanding principal amount, interest rate of 4.2%; matures February, 2024		13,177			13,385
Term loan - Pure Sunfarms - CA$25.0 - Canadian prime interest rate plus an applicable margin, repayable in quarterly payments equal to 2.50% of the outstanding principal amount starting June 30, 2021, interest rate of 4.2%; matures February 2024		19,713			16,535
BDC Facility - Pure Sunfarms - non-revolving demand loan at prime interest plus 3.75%, matures December 31, 2031		4,989			4,905
Unamortized deferred financing fees		(564	)		(302	)
Total	$	66,303		$	64,079

The Company’s line of credit (“Operating Loan”) had 0 amount drawn on the facility as of March 31, 2021,while there was $2,000 drawn as of December 31, 2020.

The carrying value of the assets and securities pledged as collateral for the FCC Loan as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was ~~$168,378~~$207,762 and ~~155,548,~~$86,664, respectively.

As collateral for the Operating Loan, the Company has provided promissory notes and a first priority security interest over its accounts receivable and inventory. In addition, the Company has granted full recourse guarantees and security therein. The carrying value of the assets pledged as collateral for the Operating Loan as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was ~~$27,035~~$25,033 and ~~$24,915,~~$23,443, respectively.

The Company, excluding Pure Sunfarms’ borrowings, was in compliance with all of its credit facility covenants as of March 31, 2021.

VILLAGE FARMS INTERNATIONAL, INC.

Notes to Condensed Consolidated Interim Financial Statements

(In thousands of United States dollars, except per share amounts, unless otherwise noted)

On March 15, 2021, Pure Sunfarms entered into the Third Amended and Restated Credit Agreement (the “Third Amended and Restated PSF Credit Agreement) with Farm Credit Canada and two Canadian chartered banks, which extended the maturity date of each of the PSF Revolving Line of Credit, PSF Non-Revolving Facility and the PSF Term Loan through February 7, 2024, included an unlimited guarantee from Village Farms and changed certain financial covenants. The Third Amended and Restated PSF Credit Agreement amends and updates the previous three loan facilities. The PSF Revolving Line of Credit had 0 balance as of March 31, 2021 and December 31, 2020, respectively.

Pure Sunfarms is required to comply with financial covenants, measured quarterly. As of March 31, 2021, Pure Sunfarms was in compliance with the financial covenants.

The weighted average interest rate on short-term borrowings as of March 31, 2021 and December 31, 2020 was 4.95%and 5.11%, respectively.

Accrued interest payable on the Credit Facilities and loans as of March 31, 2021 and December 31, 2020 was $177 and $189, respectively, and these amounts are included in accrued liabilities in the interim statements of financial position.

The aggregate annual maturities of long-term debt for the ~~next five years~~remainder of 2021 and thereafter are as follows:


Remainder of 2020	$	1,307
2021		2,418
Remainder of 2021			$	5,311
2022		2,406		8,001
2023		2,219		7,618
2024		2,059		26,286
2025				22,300
Thereafter		21,795		3,524

	$	32,204

Total			$	73,040

9 11	FINANCIAL INSTRUMENTS

The ~~Company records accounts receivable, accounts payable,~~Company’s financial instrumentsinclude cash and cash equivalents, trade receivables, note receivables, minority investments, trade payables, accrued liabilities, lease liabilities, note payables and ~~debt at amortized cost.~~debt. The carrying ~~values~~value of ~~these instruments~~cash and cash equivalents, trade receivables, trade payables, and accrued liabilities approximate their fair ~~value~~values due to the short-term maturity of these financial instruments. The carrying value of lease liabilities, notes payable, and debt approximate their ~~short-term maturities.~~fair values due to insignificant changes in credit risk. For its minority investments, the Company has elected the practicability election to fair value measurement, under which the investment is measured at cost, less impairment, plus or minus observable price changes of an identical or similar investment.

RELATED PARTY TRANSACTIONS AND BALANCES

On July 5, 2018, the Company entered into a Shareholder Loan Agreement (the “Loan Agreement”) with Pure Sunfarms, whereby, as of June 30, 2020, the Company had contributed $9,959 (CA$13,000) in the form of a demand loan to Pure Sunfarms. As of June 30, 2020, the loan amount bears simple interest at the rate of 3.95% per annum, calculated semi-annually. Interest will accrue and be payable upon demand. The balance of the loan, including interest, was $10,522 as of June 30, 2020.

On February 13, 2019, the Company announced that Pure Sunfarms had entered into a credit agreement with Bank of Montreal, as agent and lead lender, and Farm Credit Canada, as lender, in respect of a CA$20 million secured ~~non-revolver~~ ~~term loan “Credit Facility”). In April 2020, Pure Sunfarms expanded its Credit Facility to CA$59.0 million, including accordion provisions of CA$22.5 million. As a~~ ~~pre-condition~~ to complete the debt facility, the Company made an additional contribution of CA$8.0 (US$5.7) million in Pure Sunfarms, further increasing its majority ownership of Pure Sunfarms to 58.7% from 57.4%. Each component of the Credit Facility matures on February 7, 2022, is secured by the Delta 3 facility, and contains customary financial and restrictive covenants. The Company is not a party to the Credit Facility but has provided a limited guarantee in the amount of CA$10 million in connection with the Credit Facility.

As of June 30, 2020, the Company had $139 due from its joint venture, Pure Sunfarms, primarily for consulting services and the reimbursement of expenses which mainly occurred in the year. As of December 31, 2019, the Company had $4,610 due from Pure Sunfarms, primarily relating to an equity contribution of CA$5,940 (US$4,494) to Pure Sunfarms made by the Company, on November 19, 2019 when Emerald failed to make a required escrow equity payment to Pure Sunfarms on November 1, 2019. Emerald disputed the Company’s additional November equity contribution, as well as the cancellation of 5.94 million common shares of Pure Sunfarms that related to the failure to pay the CA$5,940 equity contribution. In an effort to narrow the issues in dispute and accelerate the resolution of this shareholder dispute, which occurred on March 2, 2020 with the Settlement Agreement, Village Farms unwound its November equity contribution in January with Pure Sunfarms providing Village Farms with a CA$5,940 (US$4,554) refund.

On March 25, 2019, the Company entered into a Grid Loan Agreement (the “Grid Loan”) with VF Hemp. The Grid Loan has a maturity date of March 25, 2022 and bears simple interest at the rate of 8% per annum, calculated monthly. As of ~~June 30, 2020,~~March 31, 2021 and December 31, ~~2019~~2020, the Grid Loan balance was ~~$10,841~~ $3,423and ~~$10,865,~~$3,545, respectively.

One of the Company’s employees is related to a member of the Company’s executive management team and received approximately ~~$55~~$37 and ~~$56~~$28 in salary and benefits during the ~~six months ended June 30, 2020 and 2019, respectively.~~

~~During the~~ three months ended ~~June 30,~~March 31, 2021 and 2020, respectively.

During 2020, the Company had advanced ~~$20~~$249 to an employee in connection with a relocation at the request of the Company. AsDuring the three months ended March 31, 2021, the employee repaid $124 of ~~June 30, 2020, this amount was included in other assets on~~ the ~~condensed consolidated interim statement~~outstanding loan balance. The remaining balance will be forgiven following one year of ~~financial position.~~

~~VILLAGE FARMS INTERNATIONAL, INC.~~

~~Notes to Condensed Consolidated Interim Financial Statements~~

~~(In thousands of United States dollars, except per share amounts, unless otherwise noted)~~

~~Summary of amounts due from~~service with the ~~joint ventures, including interest and included in the interim statements of financial position:~~Company.

   June 30, 2020    December 31, 2019
Pure Sunfarms
   $ 10,661    $ 15,418
VF Hemp
   10,841    10,865




Total
   $ 21,502    $ 26,283

INCOME TAXES

A provision for income taxes is recognized based on management’s best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual rate used for the ~~six~~three months ended ~~June 30, 2020 and June 30, 2019~~March 31, 2021 was 26% compared to 24%. for the three months ended March 31, 2020.

The recovery ~~for~~of income taxes was ~~$943~~$1,839 for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 compared to ~~provision for income taxes of ($1,152)~~ $1,012for the ~~six~~three months ended ~~June 30, 2019. The income tax provision for June 30, 2019 includes deferred tax liabilities arising from the contribution~~March 31, 2020.

VILLAGE FARMS INTERNATIONAL, INC.

Notes to Condensed Consolidated Interim Financial Statements

(In thousands of ~~the Delta 2 assets to Pure Sunfarms.~~United States dollars, except per share amounts, unless otherwise noted)

SEGMENT AND GEOGRAPHIC INFORMATION

Segment reporting is prepared on the same basis that the Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, manages the business, makes operating decisions and assesses performance. Management has determined that the Company operates in ~~three~~3 segments. The Company’s three segments include ~~the~~Cannabis, Produce ~~business, the Energy business~~ and ~~the Company’s~~Energy. The Cannabis segment produces and supplies cannabis products to be sold to other licensed providers and ~~hemp segment.~~provincial governments across Canada and internationally. The Produce business produces, markets, and sells ~~the product group which consists of~~ premium quality tomatoes, bell peppers and cucumbers. The Energy business produces power that it sells per a long-term contract to its one customer. ~~For segment information regarding the Company’s cannabis and hemp segment refer to Note 7 – Investments – Equity Method and Joint Ventures.~~

The Company’s primary operations are in the United States and Canada. Segment information ~~for the three and six months ended June 30, 2020 and 2019:~~is summarized below:

   Three months ended June 30,    Six months ended June 30,
   2020    2019    2020    2019
Sales

Produce – U.S.
   $ 40,281    $ 33,661    $ 69,596    $ 61,860
Produce – Canada
   7,174    7,423    9,821    10,802
Energy – Canada
   118    245    268    557








   $ 47,573    $ 41,329    $ 79,685    $ 73,219








Interest expense

Produce – U.S.
   $ 5    $ 32    $ 12    $ 65
Produce – Canada
   418    618    933    1,261
Energy – Canada
   14    19    29    37








   $ 437    $ 669    $ 974    $ 1,363








Interest income

Corporate
   $ 93    $ 211    $ 476    $ 347








   $ 93    $ 211    $ 476    $ 347








Depreciation

Produce – U.S.
   $ 1,040    $ 1,005    $ 2,086    $ 2,025
Produce – Canada
   298    328    599    747
Energy – Canada
   153    227    336    455








   $ 1,491    $ 1,560    $ 3,021    $ 3,227








Gross margin

Produce – U.S.
   $ (99 )    $ (5,441 )    $ 1,218    $ (4,736 )
Produce – Canada
   3,822    2,678    3,448    2,738
Energy – Canada
   (194 )    (207 )    (372 )    (297 )








   $ 3,529    $ (2,970 )    $ 4,294    $ (2,295 )

	Three months ended March 31,
	2021			2020
Sales
Produce	$	34,867		$	31,962
Cannabis		17,460			—
Energy		69			150
	$	52,396		$	32,112
Gross margin
Produce	$	717		$	943
Cannabis		2,212			—
Energy		(622	)		(178	)
	$	2,307		$	765

   June 30, 2020    December 31, 2019
Total assets

United States
   $ 89,716    $ 88,395
Canada
   105,697    92,067
Energy – Canada
   2,528    2,946




   $ 197,941    $ 183,408

   June 30, 2020    December 31, 2019
Property, plant and equipment, net

United States
   $ 39,488    $ 41,656
Canada
   18,669    18,759
Energy – Canada
   2,341    2,743




   $ 60,498    $ 63,158

INCOME (LOSS) PER SHARE

Basic and diluted net income (loss) per ordinary share is calculated as follows:


	Three months ended June 30,					Six months ended June 30,				Three months ended March 31,
	2020			2019		2020		2019		2021			2020
Numerator:
Net (loss) income	$	(119	)	$	3,716	$	4,071	$	10,182	$	(7,382	)	$	4,190


Denominator:
Weighted average number of common shares - Basic		56,339			48,825		54,636		48,322
Weighted average number of common shares - basic											76,022			52,933
Effect of dilutive securities- share-based employee options and awards		—			1,887		1,120		1,837		—			1,242

Weighted average number of common shares - Diluted		56,339			50,712		55,756		50,159


Weighted average number of common shares - diluted											76,022			54,175
Antidilutive options and awards		2,479			2,612		650		310		300			510

Net (loss) income per ordinary share:
Basic	$	(0.00	)	$	0.08	$	0.07	$	0.21	$	(0.10	)	$	0.08

Diluted	$	(0.00	)	$	0.07	$	0.07	$	0.20	$	(0.10	)	$	0.08

14	~~SHARE-BASED COMPENSATION PLAN~~

~~Share-based compensation expense for the three and six months ended June 30, 2020 was $328 and $857, and $701 and $1,997 for the three and six months ended June 30, 2019, respectively.~~

VILLAGE FARMS INTERNATIONAL, INC.

Notes to Condensed Consolidated Interim Financial Statements

(In thousands of United States dollars, except per share amounts, unless otherwise noted)

16	SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

On January 20, 2021, the Company closed a registered direct offering with certain institutional investors for the purchase and sale of an aggregate of 10,887,097 common shares at a purchase price of $12.40per common share for gross proceeds of approximately $135 millionbefore placement agent fees and other offering expenses.

On September 10, 2020, the Company sold 9,396,226 units through a registered direct offering. Each unit that was sold consisted of one common share of the Company and one-half (0.5) of a warrant to purchase a common share of the Company at a price of $5.80. On March 10, 2021, the warrants became exercisable and will expire on September 10, 2025. As of March 31, 2021, 3,045,283 of the warrants have been exercised.

Share-based compensation expense for the three months ended March 31, 2021 and 2020 was $1,998 and $529, respectively.

Stock option activity for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 is as follows:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at January 1, 2021		3,067,322		C$	6.91		6.82	$	20,051
Exercised		(104,000	)	C$	1.40		0.00	$	—
Outstanding at March 31, 2021		2,963,322		C$	7.10		6.72	$	28,661
Exercisable at March 31, 2021		1,717,501		C$	5.45		4.90	$	19,490

   Number of
Options    Weighted
Average
Exercise Price    Weighted
Average
Remaining
Contractual
Term (years)    Aggregate
Intrinsic
Value
Outstanding at December 31, 2019
�� 2,452,666    CA$ 5.12    5.60    $ 11,435
Granted
   200,000    CA$ 7.29    9.92    $ —
Exercised
   (141,999 )    CA$ 1.27    1.74    $ —
Forfeited
   (31,667 )    CA$ 5.94    —      $ —



Outstanding at June 30, 2020
   2,479,000    CA$ 5.51    5.69    $ 7,497



Exercisable at June 30, 2020
   1,861,338    CA$ 3.51    4.62    $ 7,426

Performance-based shares activity for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 was as follows:

   Number of
Performance-based
Shares    Weighted Average
Grant Date Fair
Value
Outstanding at December 31, 2019
   739,000    CA$ 7.92
Granted
   10,000    CA$ 7.16
Received
   (10,000 )    CA$ 7.16
Forfeited/expired
   (54,000 )    CA$ 8.09



Outstanding at June 30, 2020
   685,000    CA$ 7.91



Exercisable at June 30, 2020
   30,000    CA$ 12.87

	Number of Performance-based Restricted Share Units			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2021		869,000		C$	7.51
Received		(243,000	)	C$	6.53
Outstanding at March 31, 2021		626,000		C$	7.89
Exercisable at March 31, 2021		5,000		C$	5.79

COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company and its subsidiaries may become defendants in certain employment claims and other litigation. The Company records a liability when it is probable that a loss has been incurred and the amount iscan be reasonably ~~estimable.~~estimated. The Company is not involved in any legal proceedings other than routine litigation arising in the normal course of business, none of which the Company believes will have a material adverse effect on the Company’s business, financial condition or results of the operations.

As of March 31, 2021, Pure Sunfarms had a commitment of $1,000 in the event of a service agreement break up.

18	SUBSEQUENT EVENTS

On May 7, 2021, the Company entered into an Amended and Restated Credit Agreement with Bank of Montreal, which among other things, reduces the revolving commitment to a maximum of $10,000 less letters of credit, and extends the terms of the agreement to May 7, 2024.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated interim financial statements and related notes included in Item 1 of Part I of this Quarterly Report and the Management’s Discussion and Analysis of Financial Condition and Results of Operations and consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, ~~2019. The June 30, 2019 figures are based on the Company’s recently restated U.S. Generally Accepted Accounting Principles (“GAAP”) results filed on Form~~ ~~8-K~~ on April 22, 2020 and not the Company’s financial statements, prepared in accordance with International Accounting Standard 34 – Interim Financial Reporting as issued by the International Accounting Standards Board, filed in August 2019. 2020.This discussion and analysis contain forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our actual results could differ materially from the results anticipated by our forward-looking statements, particularly in light of the ongoing and developing COVID-19 pandemic. In particular, we encourage you to review the risks and uncertainties described in “Risk Factors” in Part I, Item 1A in the Annual Report on Form 10-K for the year ended December 31, 2020. These risks and uncertainties could cause actual results to differ materially from those projected or implied by our forward-looking statements contained in this report. These forward-looking statements are made as of the date of this management’s discussion and analysis, and we do not intend, and do not assume any obligation, to update these forward-looking statements, except as required by law. See “Forward-Looking Statements”.

EXECUTIVE OVERVIEW

~~Through our majority ownership position in our joint venture,~~Village Farms International, Inc. (“VFF”), the ~~British Columbia-based Pure Sunfarms Corp. (“PSF”~~parent company, together with its subsidiaries (collectively, the “Company”, “Village Farms”, “we”, “us”, or ~~“Pure Sunfarms”~~“our”)~~, we have one of the single largest cannabis growing operations in the world. We~~ are ~~also~~ one of the largest and longest-operating vertically integrated greenhouse growers in North America and the only publicly traded greenhouse produce company in Canada. ~~Further,~~Following our acquisition of the remaining 41.3% interest in British Columbia-based Pure Sunfarms Corp. (“Pure Sunfarms” or “PSF”) that was completed on November 2, 2020 (the “Pure Sunfarms Acquisition”), we ~~have joint venture~~now own one of the single largest cannabis growing operations in ~~hemp~~the world, one of the lowest-cost greenhouse producers and ~~high cannabidiol (“CBD”) products.~~

one of the best-selling brands in Canada. Pure Sunfarms leverages our 30 years of experience as a vertically integrated greenhouse grower for the rapidly ~~emerging~~developing cannabis opportunity ~~following legalization of cannabis~~ in Canada. Pure Sunfarms is currently one of the largest producers of cannabis in Canada with distribution in five ~~of the provinces. Its~~Canadian provinces: British Columbia, Ontario, Alberta, Saskatchewan, and Manitoba. Our long-term objective for Pure Sunfarms is to be the leading low cost, high quality cannabis producer in Canada.

In our greenhouse operations, we produce and distribute fresh, premium-quality produce with consistency 365 days a year ~~to national grocers in the U.S. and Canada~~ from more than ~~nine~~eight million square feet of Controlled Environment Agriculture (“CEA”) greenhouses in British Columbia (“B.C.”) and Texas, as well as from our partner greenhouses in ~~British Columbia,~~B.C., Ontario, and Mexico. ~~We are also pursuing opportunities~~The Company primarily markets and distributes under its Village Farms® brand name to ~~become~~retail supermarkets and dedicated fresh food distribution companies throughout the United States and Canada.

The Company, through its subsidiary VF Clean Energy, Inc. (“VFCE”), owns and operates a ~~vertically integrated leader~~7.0-megawatt power plant from landfill gas that generates electricity and provides thermal heat, in colder months, to one of the Company’s adjacent B.C. greenhouse facilities and sells electricity to British Columbia Hydro and Power Authority (“BC Hydro”). On November 10, 2020 we announced we will be transitioning this operation to a renewable natural gas facility (“Delta RNG Project”) in conjunction with Mas Energy, LLC (“Mas Energy”) which is expected to enhance our financial return as well as provide food-grade CO2, which can be used in both our cannabis and produce growing operations in Delta, B.C.

The Company entered the U.S. hemp business in the ~~U.S. hemp-derived CBD market, subject to compliance with all applicable U.S. federal and state laws.~~spring of 2019 after the passing of the 2018 Farm Bill. We ~~have~~ established ~~two~~a joint ~~ventures,~~venture, Village Fields Hemp USA, LLC (“~~VF Hemp” or “VFH”), and Arkansas Valley Green and Gold Hemp LLC (“AVGG Hemp”~~VFH”), for multi-state outdoor hemp cultivation and ~~CBD~~cannabidiol (“CBD”) extraction, and initiated plans to pursue controlled environment hemp production at our Texas greenhouse ~~operations, which total 5.7~~operations.

Internationally, we evaluate, and target select, nascent, legal cannabis and CBD opportunities with significant long-term potential, with an initial focus on the Asia-Pacific region through our investment in Australia-based Altum International Pty Ltd (“Altum”).

Registered Direct Offering

On January 20, 2021, Village Farms completed a registered direct offering with certain institutional investors for the purchase and sale of an aggregate 10,887,097 Common Shares at a purchase price of $12.40 (approximately C$15.70) per Common Share for gross proceeds of approximately $135 million ~~square feet of production area, subject to legalization of hemp in Texas. Our subsidiary VF Clean Energy, Inc. (“VFCE”), owns~~(approximately C$171 million) before placement fees and ~~operates a 7.0 MW power plant that generates electricity.~~other offering expenses payable by Village Farms.

~~Recent developments relating~~Update Relating to the ~~outbreak~~Outbreak of the Coronavirus ~~pandemic~~ ~~(“COVID-19”)~~Pandemic

In March 2020, the World Health Organization declared the outbreak of the COVID-19 virus a global pandemic. This outbreak continues to cause major disruptions to businesses and markets worldwide as the virus continues to spread. A number of countries as well as certain states and cities within the United States and Canada have enacted temporary closures of businesses, issued quarantine or shelter-in-place orders, and taken other restrictive measures in response to COVID-19.

To date, all of our operations are operating normally, however, the extent to which COVID-19 and the related global economic crisis affect our business, results of operations and

financial condition, will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any recovery period, future actions taken by governmental authorities, central banks and other third parties (including new financial regulation and other regulatory reform) in response to the pandemic, and the effects on our produce, clients, vendors and employees. We continue to service our customers amid uncertainty and disruption linked to COVID-19 and we are actively managing our business to respond to the impact.

Recent Developments

Repayment of Emerald Promissory Note

On February 5, 2021, Village Farms repaid in full the Promissory Note of C$19,900 plus accrued interest of C$622 to Emerald Health Therapeutics, Inc. (”Emerald”), that was issued in conjunction with the Purchase Agreement on September 8, 2020. The Company no longer owes any amounts to Emerald with respect to the Pure Sunfarms Transaction and the previously pledged 9,239,625 Common Shares of Pure Sunfarms have been released to the Company by the collateral agent.

The Company was added to the S&P/TSX Composite Index

Village Farms was added to the S&P/TSX Composite Index (Consumer Staples sector) prior to trading on March 22, 2021. The S&P/TSX Composite Index is the headline index for the Canadian equity market and is the broadest index in the S&P/TSX family. We believe that inclusion in the S&P/TSX Composite Index can potentially broaden participation in the Company's investor base by enabling investments from index funds and similar investment vehicles.

Exercise of Warrants

In the first quarter of 2021, warrants issued as part of the September 2020 registered direct offering were exercised, resulting in proceeds to the Company of $17,663 and the issuance of 3,045,283 additional Common Shares. There are 1,652,830 remaining warrants from the September 2020 registered direct offering as of the date of this filing.

Amendment of the Company’s Operating Loan

On May 7, 2021, Village Farms amended the Operating Loan terms to extend the credit agreement with an amended line of credit of C$10,000 and maturity date of May 7, 2024. See “Liquidity and Capital Resources – Operating Loan”.

Pure Sunfarms

During the first quarter of 2021, Pure Sunfarms continued seeking opportunities to increase its production, sales, brand awareness and global footprint. A few notable accomplishments include:

•

Pure Sunfarms unveiled its first cannabis-infused edible products, Pure Sunfarms Real Fruit Gummies, made using real fruit, containing only natural flavors and colors, and are pectin-based, clean label and vegan.

•

On March 15, 2021, Pure Sunfarms amended its existing bank syndicated loan facilities, extending the maturity date from February 2022 to February 2024. See “Liquidity and Capital Resources – Pure Sunfarms Loans”.

Village Farms Clean Energy

In November 2020, VFCE entered into a partnership with Mas Energy to convert the current landfill gas to electricity business into a state-of-the-art landfill gas to high-demand renewable natural gas facility. Mas Energy will design, build, finance, own and operate the Delta RNG Project. VFCE renewed and extended the existing contract with the City of Vancouver to capture the landfill gas at its Delta, B.C. site. The 20-year extension, with a five-year option, commences upon the start-up of the commercial operations of the Delta RNG Project. We anticipate that the conversion to the Delta RNG Project will begin mid-2021 with commercial operations to commence in mid-2022. We expect the project to capture the CO2 from the renewable natural gas production process and make it available to Village Farms for producing crops in its three Delta, B.C. vegetable and cannabis greenhouses. The reduction in natural gas requirements is expected to decrease the total carbon footprint of Village Farms.

International

On February 8, 2021, Village Farms exercised an option to increase its equity investment in Altum from 6.6% to just under 10%. On May 5, 2021, Village Farms exercised its remaining option to increase its equity investment in Altum to just under 12%. The investment in Altum, one of Asia-Pacific’s leading CBD platforms, represents a capital efficient means to participate in opportunities in this region.

Presentation of Financial Results

Our consolidated results of operations (prior to net income) for the three months ended March 31, 2021 and 2020 presented below reflect the operations of our consolidated wholly owned subsidiaries, which does not include our VFH joint venture. The equity in earnings from VFH is reflected in our net income for the three months ended March 31, 2021 and 2020 presented below. Due to the acquisition of our joint venture, Pure Sunfarms, on November 2, 2020, the equity earnings from Pure Sunfarms are reflected in our net

income for March 31, 2020. However, for the three months ended March 31, 2021, the results of Pure Sunfarms are presented in the operations of our consolidated wholly owned subsidiaries. For information regarding the results of operations from our joint ventures, see “Reconciliation of Generally Accepted Accounting Practices (“GAAP”) Results to Proportionate Results” below.

RESULTS OF OPERATIONS

~~Consolidated Financial Performance~~

(In thousands of U.S. dollars, except per share ~~amounts)~~amounts, and unless otherwise noted)

Consolidated Financial Performance

   For the three months ended
June 30,    For the six months ended
June 30,
   2020    2019    2020    2019
Sales
   $ 47,573    $ 41,329    $ 79,685    $ 73,219
Cost of sales
   (44,044 )    (44,299 )    (75,391 )    (75,514 )
Gross margin
   3,529    (2,970 )    4,294    (2,295 )
Selling, general and administrative expenses
   (3,813 )    (3,949 )    (7,734 )    (8,188 )
Stock compensation expense
   (328 )    (701 )    (857 )    (1,997 )
Interest expense
   (437 )    (669 )    (974 )    (1,363 )
Interest income
   93    211    476    347
Foreign exchange gain (loss)
   530    243    (396 )    521
Gain on settlement agreement
   —      —      4,681    —
Other income, net
   26    282    65    152
(Loss) gain on disposal of assets
   —      —      (6 )    13,564
(Provision for) recovery of income taxes
   (69 )    3,284    943    (1,152 )
Net (loss) income from consolidated entities
   (469 )    (4,269 )    492    (411 )
Equity earnings of unconsolidated entities
   350    7,985    3,579    10,593
Net (loss) income
   $ (119 )    $ 3,716    $ 4,071    $ 10,182
Adjusted EBITDA (1)
   $ 2,268    $ 4,644    $ 3,364    $ 5,990
Earnings per share - basic
   $ (0.00 )    $ 0.08    $ 0.07    $ 0.21
Earnings per share – diluted
   $ (0.00 )    $ 0.07    $ 0.07    $ 0.20

	For the three months ended March 31,
	2021⁽¹⁾			2020⁽¹⁾
Sales	$	52,396		$	32,112
Cost of sales		(50,089	)		(31,347	)
Gross margin		2,307			765
Selling, general and administrative expenses		(8,092	)		(3,921	)
Share-based compensation		(1,998	)		(529	)
Interest expense		(741	)		(537	)
Interest income		3			383
Foreign exchange loss		(504	)		(926	)
Gain on settlement agreement		—			4,681
Other (expense) income		(69	)		39
Loss on disposal of assets		—			(6	)
Recovery of income taxes		1,839			1,012
(Loss) income from consolidated entities after income taxes		(7,255	)		961
Equity (losses) earnings of unconsolidated entities		(127	)		3,229
Net (loss) income	$	(7,382	)	$	4,190
Adjusted EBITDA ⁽²⁾	$	404		$	1,096
(Loss) earnings per share - basic	$	(0.10	)	$	0.08
(Loss) earnings per share – diluted	$	(0.10	)	$	0.08

(1)	For the three months ended March 31, 2021, Pure Sunfarms is fully consolidated in the financial results of the Company. For the three months ended March 31, 2020, Village Farms share of Pure Sunfarms earnings are reflected in equity (losses) earnings from unconsolidated entities.

(2)

Adjusted EBITDA is not a recognized earnings measure and does not have a standardized meaning prescribed by GAAP. Therefore, Adjusted EBITDA may not be comparable to similar measures presented by other issuers. See ~~“Non-GAAP~~“Non-GAAP Measures” for a definition and reconciliation of Adjusted EBITDA to net (loss) income, the nearest comparable measurement under GAAP. Management believes that Adjusted EBITDA is a useful supplemental measure in evaluating the performance of the Company. Adjusted EBITDA includes the Company’s majority non-controlling interest in Pure Sunfarms (through November 1, 2020), and 65% interest in VFH.

~~JV Cannabis Business – Pure Sunfarms~~

~~Set forth below are the operating~~We caution that our results of ~~PSF,~~operations for the three months ended March 31, 2021 and 2020 may not be indicative of our future performance, particularly in light of the ongoing COVID-19 pandemic. We are currently unable to assess the ultimate impact of the COVID-19 pandemic on our business and our results of operations for future periods.

Segmented Financial Performance

The following segmented financial information includes the financial results of our cannabis segment (Pure Sunfarms), before any allocation to Village Farms, which ~~are~~were not consolidated in our financial results ~~in accordance with GAAP. A discussion of our consolidated results, including our Produce Segment, is included further below.~~

~~For the three months ended June 30, 2020 compared to the three months ended June 30, 2019.~~

~~Sales~~

Sales for the three months ended June 30, 2020 and 2019 were $9,386 and $24,244, respectively, a decrease of (61.3%). The decrease was a result of lower 2020 average selling price for the three months ended June 30, 2020 versus the three months ended June 30, 2019 at which time all of Pure Sunfarms’ sales were solely through the wholesale channel during a period of elevated market pricing.

During the three months ended June 30, 2020, 56% of kilograms sold (flower) were to provincial boards, with the remaining 44% of kilograms sold (flower and trim) being through the wholesale channel, including nonmonetary transactions with extraction licensed producers in which Pure Sunfarms sold extraction grade dried flower and trim and purchased various forms of distillate from the same counterparties, which will be Pure Sunfarms in future cannabis 2.0 product launches.

~~The net average selling price for the three months ended June 30, 2020 was lower than the net average selling price~~ for the three months ended March 31, 2020 ~~by (48.6%). Kilograms sold to provincial boards~~and consolidated in our financial results for the three months ended ~~June 30,~~March 31, 2021.


	Three months ended March 31, 2021	Three months ended March 31, 2020
Sales:
Produce	$ 34,867	$ 31,962
Cannabis	17,460	13,137
Clean Energy	69	150
	$ 52,396	$ 45,249
Cost of Sales:
Produce	($ 34,066)	($ 30,928)
Cannabis⁽¹⁾	(15,248)	(6,258)
Clean Energy	(775)	(419)
	($ 50,089)	($ 37,605)
Selling, general and administrative expenses:
Produce	($ 2,551)	($ 2,535)
Cannabis	(3,966)	(2,434)
Clean Energy	(32)	(45)
Corporate	(1,543)	(1,341)
	($ 8,092)	($ 6,355)
Share-based compensation:
Produce	$ -	$ -
Cannabis	(1,094)	-
Clean Energy	-	-
Corporate	(904)	(529)
	($ 1,998)	($ 529)
Operating profit/(loss):
Produce	($ 1,750)	($ 1,501)
Cannabis⁽¹⁾	(2,848)	4,445
Clean Energy	(738)	(314)
Corporate	(2,447)	(1,870)
	($ 7,783)	$ 760

(1)

For the three months ended March 31, 2021, Pure Sunfarms’ cost of sales included a $2,925 charge from the revaluation of its inventory to fair value at November 2, 2020 acquisition date.

Discussion of Financial Results

A discussion of our consolidated results for the three months ended March 31, 2021 and 2020 ~~increased 89% over~~is included below. The consolidated results include all three of our operating segments, which include produce, cannabis and energy, along with all public company expenses. Pure Sunfarms was acquired in its entirety on November 2, 2020; for the three months ended March 31, 2021, the operating results of Pure Sunfarms are consolidated in our Consolidated Statements of Income (Loss), and for the three months ended March 31, 2020, Pure Sunfarms’ results are included in equity earnings from unconsolidated entities in our Consolidated Statements of Income (Loss).

We also present a discussion of the operating results of Pure Sunfarms, before any allocation to Village Farms, which were not consolidated in our financial results for the three months ended March 31, 2020 but were consolidated in our results for the three months ended March 31, 2021. As a result of the Pure Sunfarms Acquisition, Pure Sunfarms recognized an increase in the fair value of its inventory on-hand on the acquisition date, resulting in a $2,925 charge to cost of sales ~~to provincial boards~~ in the first quarter of ~~2020. Wholesale kilograms sold decreased (39%)~~2021 and a $3,295

charge to cost of sales in the ~~second quarter for 2020 versus the first~~fourth quarter of ~~2020. Total kilogram volume sold~~2020 from the revaluation of its inventory to fair value. This is a non-cash accounting charge to cost of sales and should be adjusted for when analyzing the actual operational results of Pure Sunfarms.

Consolidated Results

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Sales

Sales for the three months ended ~~June 30, 2020 was consistent with the kilograms sold in the first quarter.~~

Net sales, and hence net average selling price, for three months ended June 30, 2020 was impacted by price adjustments, cash discounts and increased co-op allowances on small format and pre-roll SKUs in orderMarch 31, 2021 were $52,396 as compared to continue Pure Sunfarms market leading value priced SKUs, in part due to the success of the Pure Sunfarms large format SKUs. Additionally, an increase in the provision for returns was taken on various strains with a single provincial board that Pure Sunfarms has agreed to accept, and which Pure Sunfarms will utilize of its future cannabis 2.0 products.

~~Cost of Goods~~

~~Cost of goods sold~~$32,112 for the three months ended ~~June 30, 2020~~March 31, 2020. The increase in sales was primarily due to the inclusion of Pure Sunfarms’ Q1 2021 revenues of $17,460 and ~~2019 was $6,266 and $3,956, respectively, an increase of 58.4%. The total cost increase is driven by~~ an increase in ~~retail~~produce supply partner sales of $4,139, partially offset by a decrease in our own produce sales of ($1,234) and VFCE power sales of ($81). The produce supply partner sales increase was due to higher volumes of pounds sold of tomatoes, peppers, cucumbers and mini-cucumbers. The decrease in our own produce sales was due to a ~~period over period~~(24%) decrease in the average selling price of tomatoes in the three months ended March 31, 2021 versus March 31, 2020, partially offset by a 14% increase in ~~grams sold.~~our own production volume. The ~~all-in~~ ~~cost~~price decrease is the result of ~~grams sold~~a market supply overage caused by lower retailer demand along with an increase in Canadian tomato production from new acreage under light in 2021. The tomato produce industry is currently experiencing one of the lowest pricing environments for tomatoes-on-the-vine and beefsteak varieties in the ~~second quarter~~past ten years.

Cost of ~~2020 was $0.61 per gram (CA$0.84), versus $0.49 per gram (CA$0.65) in the second quarter~~Sales

Cost of ~~2019. The higher cost in 2020 was primarily driven by additional packaging and logistics costs incurred for retail~~ sales ~~versus all sales were made to wholesale channel in 2019.~~

~~Costs per gram sold~~ for the three months ended ~~June 30, 2020~~March 31, 2021 were ~~lower than costs per gram sold in~~$50,089 as compared to $31,347 for the ~~first quarter of 2020, by 5%, even with the significant~~three months ended March 31, 2020. The increase in ~~retail~~cost of sales ~~quarter over quarter, which is~~was primarily due to the addition of Pure Sunfarms’ Q1 2021 cost of sales of $15,248, an increase in produce supply partner costs of $3,282 and higher clean energy costs of $356, partially offset by a ~~reflection~~decrease in our own production cost of sales of ($144). The Q1 2021 cost of sales for Pure Sunfarms includes a $2,925 charge from the revaluation of its inventory to fair value at acquisition date. The increase in produce supply partner cost of sales was driven by higher volumes of pounds sold and the increase in ~~large format SKUs~~clean energy costs were driven by higher depreciation charges. The decrease in ~~the product mix~~our own production costs was driven by lower cost per pound production at two of our Texas facilities and ~~continued low~~better utilization of our transportation and handling cost, ~~of cultivation.~~primarily due to greenhouse management efficiency efforts.

Gross Margin

Gross margin for the three months ended ~~June 30, 2020 was 33.2% versus 83.7%~~March 31, 2021 increased $1,542 to $2,307, for a 4% gross margin (including the $2,925 charge from the revaluation of Pure Sunfarms’ inventory to fair value at acquisition date), in comparison to $765, for a 2% gross margin, for the three months ended ~~June 30, 2019. The reduction was~~March 31, 2020. Gross margin for the three months ended March 31, 2021 increased $4,467 to $5,232, for a 10% gross margin (excluding the $2,925 charge from the revaluation of Pure Sunfarms’ inventory to fair value at acquisition date). Gross margin (excluding the revaluation charge) increased due to the ~~lower price environment in 2020 versus 2019 and the change in mix to retail sales in 2020 versus all wholesale sales in the second quarter~~inclusion of ~~2019. Retail sales involve incremental packaging and logistics costs over bulk wholesale sales.~~

~~The~~Pure Sunfarms’ Q1 2021 gross margin of ~~33.2% in the second quarter is~~$5,137, partially offset by a lower ~~than the 52.2% in the first quarter~~produce gross margin of ~~2020~~($226) and a lower clean energy gross margin of ($444). The decreased produce gross margin was primarily due to a lower ~~pricing environment~~prices for tomatoes in Q1 2021 and the ~~second quarter of 2020 versus the first quarter of 2020 in both the retail and wholesale channels as well~~lower gross margin for clean energy was driven by higher depreciation charges as the ~~price adjustments, cash discounts, increased co-op allowances and an increase~~depreciable life of VFCE assets have been accelerated due to the upcoming transition of operations to the Delta RNG Project expected in ~~the return provision in the second quarter of 2020.~~mid-2021.

Selling, General and Administrative ~~Expense~~Expenses

Selling, general and administrative expenses for the three months ended ~~June 30,~~March 31, 2021 increased $4,171 to $8,092 compared to $3,921 for the three months ended March 31, 2020. The increase was primarily due to the inclusion of Pure Sunfarms’ expenses of $3,966 and an increase in corporate expenses, primarily related to public company costs such as investor relations, legal and regulatory fees, listing fees for the TSX, January 2021 equity raise and incremental costs of U.S. reporting compliance.

Share-Based Compensation

Share-based compensation expenses for the three months ended March 31, 2021 were $1,998 as compared to $529 for the three months ended March 31, 2020. The increase in share-based compensation was primarily due to the vesting of performance share grants for Pure Sunfarms’ management of $1,094 in Q1 2021 versus nil in Q1 2020, along with the cost of issuing stock options in December 2020.

Gain on Settlement Agreement

On March 2, 2020, pursuant to the settlement agreement between the Company, Pure Sunfarms and Emerald (“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 $4,681 (C$6,500). The Company recorded this amount as a gain on non-monetary exchange on the Consolidated Statement of Income (Loss) and Comprehensive Income (Loss) for the three months ended March 31, 2020.

Recovery of Income Taxes

Income taxes for the three months ended March 31, 2021 was a recovery of $1,839 compared to a recovery of $1,012 for the three months ended March 31, 2020. For the three months ended March 31, 2021 and 2020, our effective tax rate, including both current and deferred income taxes, was 19.9% and 31.8%, respectively. The equity losses for our unconsolidated entity, VFH, is reported post-tax and therefore does not affect our tax calculation. Our share of income for Pure Sunfarms was presented in equity earnings from unconsolidated entities for the three months ended March 31, 2020. Village Farms began fully consolidating operating results of Pure Sunfarms on November 2, 2020; Pure Sunfarms’ operating results are fully consolidated for the three months ended March 31, 2021.

Equity (Losses) Earnings from Unconsolidated Entities

Our share of earnings from our joint ventures for the three months ended March 31, 2021 was ($127) compared to $3,229 for the three months ended March 31, 2020. Our share of income from Pure Sunfarms was presented in equity earnings from unconsolidated entities for the three months ended March 31, 2020. Village Farms began fully consolidating operating results of Pure Sunfarms on November 2, 2020 and ~~2019~~its results are presented in the Company’s consolidated operating results for the three months ended March 31, 2021. For information regarding the results of operations from our joint ventures, see “Reconciliation of U.S. GAAP Results to Proportionate Results” below.

Net (Loss) Income

Net loss for the three months ended March 31, 2021 was ~~$1,850 and $1,786, respectively, an increase~~($7,382) as compared to net income of ~~3.6%.~~$4,190 for the three months ended March 31, 2020. The ~~increase~~decrease in net income is primarily due to ~~regulatory fees~~a lower gross margin from Pure Sunfarms (which includes the $2,925 charge from the revaluation of its inventory to fair value at acquisition date) and higher company-wide selling, general and administrative expense and share-based compensation in the three months ended March 31, 2021 as compared to March 31, 2020, which also included a gain from the Settlement Agreement of $4,681 in March 2020.

Adjusted EBITDA

Adjusted EBITDA for ~~Health Canada~~the three months ended March 31, 2021 was $404 compared to $1,096 for the three months ended March 31, 2020. The decrease in adjusted EBITDA was primarily due to lower operating results of both Pure Sunfarms and the produce business. See the reconciliation of Adjusted EBITDA to net income in “Non-GAAP Measures—Reconciliation of Net Earnings to Adjusted EBITDA”.

Cannabis Segment Results – Pure Sunfarms

Pure Sunfarms’ comparative analysis are based on the consolidated results of Pure Sunfarms for the three months ended March 31, 2021, December 31, 2020, and March 31, 2020, not accounting for the percentage owned by Village Farms. As a result of the Pure Sunfarms Acquisition, Pure Sunfarms recognized an increase in ~~staffing.~~the fair value of its inventory on-hand on the acquisition date, resulting in a $2,925 charge to cost of sales in the first quarter of 2021 and a $3,295 charge to cost of sales in the fourth quarter of 2020 from the revaluation of its inventory to fair value. This is a non-cash accounting charge to cost of sales and should be adjusted for when analyzing the actual operational results of Pure Sunfarms. See “Reconciliation of U.S. GAAP Results to Proportionate Results” for a presentation of Pure Sunfarms’ proportionate results for the three months ended March 31, 2021 and March 31, 2020.

Three Months Ended March 31, 2021 Compared to Three Months Ended December 31, 2020

Sales

Pure Sunfarms’ net sales for the three months ended March 31, 2021 were $17,460 as compared to $17,303 for the three months ended December 31, 2020. The ~~second quarter 2020~~sequential net sales increase was comprised of a 20% increase in branded sales, partially offset by a (49%) decrease in non-branded sales. For the three months ended March 31, 2021, 71% of revenue was generated from branded flower and 13% of revenue from tinctures and Cannabis 2.0 products (branded cannabis oil, edibles and vapes) as compared to 56% of revenue from branded flower and 12% of revenue from tinctures and Cannabis 2.0 products for the three months ended December 31, 2020. For the three months ended March 31, 2021, non-branded sales represented 16% of revenues compared to 32% for the three months ended December 31, 2020.The decrease in non-branded sales between comparable periods was driven primarily by an oversaturated wholesale market combined with the impact of several provincial boards initiating stock keeping unit (“SKU”) rationalization and management of their March 31, 2021 fiscal year-end inventory levels, which decreased demand from other licensed producers (“LP”) in the wholesale market.

Cost of Sales

Pure Sunfarms’ cost of sales for the three months ended March 31, 2021 was $15,248 as compared to $13,918 for the three months ended December 31, 2020. The Q1 2021 and Q420 cost of sales for Pure Sunfarms includes a $2,925 and $3,295 charge, respectively, from the revaluation of its inventory to fair value at acquisition date. The increase in cost of sales between periods was driven by the higher volume of branded sales which require incremental costs for manufacturing, packaging and distribution.

Gross Margin

Gross margin for the three months ended March 31, 2021 decreased ($1,173) to $2,212, for a 13% gross margin, in comparison to $3,385, for a 20% gross margin, for the three months ended December 31, 2020. Gross margin for the three months ended March 31, 2021 decreased ($1,542) to $5,137, for a 29% gross margin (excluding the purchase price inventory adjustment of $2,925), in comparison to $6,679, for a 39% gross margin (excluding the purchase price inventory adjustment of $3,295), for the three months ended December 31, 2020. The decrease in gross margin between periods was primarily due to the increase in cost of sales associated with the higher volume of branded sales in 2021 that require incremental costs for manufacturing, packaging and distribution.

Selling, General and Administrative Expenses

Pure Sunfarms’ selling, general and administrative expenses ~~decreased by (24.0%) versus~~for the ~~first quarter of~~three months ended March 31, 2021 were $3,966 compared to $4,476 for the three months ended December 31, 2020. The decrease in selling, general and administrative expenses for the three months ended March 31, 2021 in comparison to the three months ended December 31, 2020 was primarily due to a reduction in ~~branding~~marketing spend and ~~marketing costs due~~lower professional fees, such as legal and consulting services, partially offset by additional headcount to ~~decreased retail marketing activity as a result~~support the growth of ~~Covid 19 as well as a one-off wage subsidy that was recognized in the second quarter as a result of a federal Covid 19 program.~~Pure Sunfarms.

~~Net Income~~Share-Based Compensation

~~Net income~~Share-based compensation expenses for the three months ended ~~June 30, 2020 and 2019 was $789 and $13,019, respectively, a decrease of (93.9%). The decrease was primarily due~~March 31, 2021 were $1,094 as compared to ~~the decrease in sales driven by lower market pricing year over year.~~

~~Adjusted EBITDA~~

~~Adjusted earnings before interest expense, income taxes, depreciation and amortization (“EBITDA”)~~$61 for the three months ended ~~June 30, 2020 and 2019 was $1,833 and $18,893, respectively.~~December 31, 2020. The ~~decrease~~increase in share-based compensation is ~~primarily~~ due to ~~lower selling prices~~the vesting of performance share grants for Pure Sunfarms’ management as well as the incremental cost of issuing stock options in December 2020.

Net (Loss) Income

Pure Sunfarms’ net loss for the three months ended ~~June 30, 2020~~March 31, 2021 was ($2,834) as compared to ($1,720) for the ~~same prior year period.~~

~~For the six~~three months ended ~~June 30, 2020 compared~~December 31, 2020. The Q1 2021 and Q420 net loss for Pure Sunfarms includes a $2,925 and $3,295 charge, respectively, from the revaluation of its inventory to ~~the six months ended June 30, 2019.~~

~~Sales~~

~~Sales for the six months ended June 30, 2020 and 2019 were $22,523 and $35,045, respectively,~~fair value at acquisition date. The higher net loss between periods was driven by a ~~decrease of (35.7%). The decrease was the result of~~lower gross margin, largely attributable to a ~~higher~~lower average selling price for non-branded sales and increased share-based compensation, partially offset by lower selling, general and administrative expenses.

Adjusted EBITDA

Adjusted EBITDA for the ~~six~~three months ended ~~June 30, 2019 when all~~March 31, 2021 and December 31, 2020 was $2,534 and $2,279, respectively. The increase in Adjusted EBITDA was driven by higher net sales and lower selling, general and administrative expenses in the three months ended March 31, 2021 as compared to the three months ended December 31, 2020. The three months ended December 31, 2020 also included a $757 write-off of a note receivable from Emerald as part of the Pure Sunfarms acquisition.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Sales

Pure Sunfarms’ sales were being made through its wholesale channel during a period of elevated market pricing. During the six months ended June 30, 2020, 43% of kilograms sold (flower) were to provincial boards, with the remaining 57% of kilograms sold (flower and trim) being through the Wholesale channel, including nonmonetary transactions with extraction licensed producers in which Pure Sunfarms sold extraction grade dried flower and trim and purchased various forms of distillate from the same counterparties, which will be Pure Sunfarms in future Cannabis 2.0 product launches. Netnet sales for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 were $17,460 as compared to $13,137 for the three months ended March 31, 2020. The period-over-period net sales increase was ~~impacted by continued lower retail pricing,~~comprised of a ~~second quarter price adjustment to various pre-roll and small format SKUs, cash discounts, increased co-op allowances as well as an~~117% increase in ~~its~~branded sales, ~~return provision~~partially offset by a (62%) decrease in non-branded sales. For the three months ended March 31, 2021, 71% of revenue was generated from branded flower and 13% of revenue from tinctures and Cannabis 2.0 products as compared to 47% of revenue from branded flower for the ~~return of products from a single provincial board that~~three months ended March 31, 2020. Pure Sunfarms ~~has agreed~~had not begun selling Cannabis 2.0 products in the three months ended March 31, 2020. For the three months ended March 31, 2021, non-branded sales represented 16% of revenues compared to ~~accept,~~53% for the three months ended March 31, 2020. The decrease in non-branded sales between periods was driven primarily by an oversaturated wholesale market combined with the impact of several provincial boards initiating SKU rationalization and management of their March 31, 2021 fiscal year-end inventory levels, which ~~will be repurposed~~decreased demand for ~~cannabis 2.0 products.~~many LPs in the wholesale market.

Cost of ~~Goods~~Sales

~~Cost~~Pure Sunfarms’ cost of ~~goods sold~~sales for the ~~six~~three months ended ~~June 30, 2020 and 2019 was $12,524 and $7,774, respectively, an~~March 31, 2021 were $15,248 as compared to $6,258 for the three months ended March 31, 2020. The Q1 2021 cost of sales for Pure Sunfarms includes a $2,925 charge from the revaluation of its inventory to fair value at acquisition date. The increase in cost of ~~61.1%. The cost increase~~sales between periods was driven by ~~a period over period increase in grams sold~~the higher volume of ~~62.4%~~branded sales which require incremental costs for manufacturing, packaging and a transition to higher costing provincial retail sales products. The cost of grams sold for the six months ended June 30, 2020 was $0.61 per gram (CA$0.83), consistent with $0.62 per gram (CA$0.82) for the first six months ended June 30, 2019.distribution.

Gross Margin

Gross margin ~~percentage~~ for the ~~six~~three months ended ~~June 30, 2020 was 44.4% versus the prior year six month~~March 31, 2021 decreased ($4,667) to $2,212, for a 13% gross margin ~~percentage~~(including the purchase price inventory adjustment of ~~77.8%~~$2,925), in comparison to $6,879, for a 52% gross margin, for the three months ended March 31, 2020. Gross margin for the three months ended March 31, 2021 decreased ($1,742) to $5,137, for a 29% gross margin (excluding the purchase price inventory adjustment of $2,925). The decrease in gross margin between comparable periods was primarily due to price compression in the ~~substantive year~~wholesale market over ~~year decrease in pricing as well as~~the past 12 months combined with the increase in ~~year over year provincial (retail)~~cost of sales associated with a higher volume of branded sales which ~~come with~~require incremental costs for manufacturing, packaging and ~~logistics costs over and above bulk wholesale products.~~distribution.

Selling, General and Administrative ~~Expense~~Expenses

Selling, general and administrative expenses for the ~~six~~three months ended ~~June 30, 2020 and 2019 was $4,284 and $2,785, respectively, an increase of 53.8%.~~March 31, 2021 increased $1,532, or (63%), to $3,966 compared to $2,434 for the three months ended March 31, 2020. The increase isin selling, general and administrative expenses was due to incremental sales support and marketing for the higher volume of branded sales in 2021 along with additional headcount to support the growth of Pure Sunfarms.

Share-Based Compensation

Share-based compensation expenses for the three months ended March 31, 2021 were $1,094 as compared to nil for the three months ended March 31, 2020. The increase in share-based compensation was primarily due to ~~higher regulatory fees to Health Canada, which are a based on provincial kilograms sold~~the vesting of performance share grants for Pure Sunfarms’ management and ~~incremental year on year costs for marketing and staffing as a direct result~~Pure Sunfarms’ management not being part of the ~~provincial retail sales in 2020, as~~ Company until November 2020.

Gain on Settlement of Net Liabilities

Pure Sunfarms ~~did not have its provincial sales license in the first six months of 2019.~~

~~Other Income~~

~~PSF~~ recognized ~~a gain on settlement of net liabilities~~income of $4,348 in the first quarter of 2020 as an outcome of the March 2, 2020 Settlement Agreement between ~~PSF,~~Pure Sunfarms, Emerald ~~Health~~ and the Company. This gain is ~~PSF’s~~Pure Sunfarm’s forgiveness of the shareholder loan and accrued interest owed by Emerald offset by the extinguishment of the ~~Supply Agreement~~supply agreement and any amounts receivable under it, which included ~~an CA$606~~a C$8,100 receivable from Emerald for sales made in ~~the first quarter of 2020 and CA$8.1 million for sales made in~~ 2019.

~~Net Income~~

Net ~~income~~(Loss) Income

Pure Sunfarms’ net loss for the ~~six~~three months ended ~~June 30, 2020 and 2019~~March 31, 2021 was ~~$6,954 and $17,422, respectively,~~($2,834) as compared to net income of $6,165 for the three months ended March 31, 2020. The Q1 2021 net loss for Pure Sunfarms includes a ~~decrease~~$2,925 charge from the revaluation of ~~60.1%.~~its inventory to fair value at acquisition date. The decrease in net income between periods was primarily due to ~~the $12,522 decrease in sales as a result of~~ lower ~~market pricing in 2020.~~

~~Adjusted EBITDA~~

~~Adjusted EBITDA, which excludes the~~ ~~one-off~~ ~~gain on settlement of net liabilities, for the six months ended June 30, 2020 and 2019 was $6,702 and $25,344, respectively. The decrease is primarily due to lower selling prices and~~gross margin, higher selling, general and administrative expenses ~~for the six months ended June 30, 2020 compared to the same prior year period.~~

~~Consolidated Line Item Results~~

~~Three months ended June 30, 2020 Compared to Three months ended June 30, 2019~~

~~Sales~~

Sales for the three months ended June 30, 2020 increased $6,244, or 15.1%, to $47,573 compared to $41,329 for the three months ended June 30, 2019. The increase in sales is primarily due to higher selling prices for tomatoes during the three months ended June 30, 2020 compared to the same prior year period. The average net selling price for all tomato pounds sold increased 39% for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 generated primarily from our commodity items, which includes beefsteak tomatoes and tomatoes on the vine (“TOVs”). The increase in net selling price in the commodity items was primarily due to a supply shortage throughout most of the first half of 2020, as well as increased grocery store traffic as a direct result of the Coronavirus. Pepper prices increased 28% and pepper pounds increased 44% when compared to the same prior year period. Cucumber prices decreased (2%) and cucumber pieces sold decreased (19%) for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

~~Cost of Sales~~

Cost of sales for the three months ended June 30, 2020 decreased ($255), or less than (1%), to $44,044 from $44,299 for the three months ended June 30, 2019 due to a higher cost per pound resulting from fewer pounds sold.

~~Selling, General and Administrative Expenses~~

Selling, general and administrative expenses for the three months ended June 30, 2020 decreased ($136), or (3.4%), to $3,813 from $3,949 for the three months ended June 30, 2019 as a result of lower produce marketing activities.

~~Share-based Compensation~~

~~Share-based compensation expense for the three months ended June 30, 2020 was $328 compared to $701 for the three months ended June 30, 2019. The decrease in~~ share-based compensation expense ~~is primarily due to~~in 2021, while 2020 also included the ~~vesting~~gain on the settlement of ~~performance shares earned related to developments in Pure Sunfarms in 2019.~~

~~Interest Expense~~

Interest expense for the three months ended June 30, 2020 decreased ($232) to $437 from $669 for the three months ended June 30, 2019. The decrease is due to lower interest rates as well as lower debt balances.

~~Interest Income~~

~~Interest income for the three months ended June 30, 2020 and 2019 was $93 and $211, respectively. Interest is no longer being accrued for the VFH grid loan.~~

~~Equity Earnings from Unconsolidated Entities~~

Equity earnings from our unconsolidated entities decreased ($7,635), or (95.6%) to $350 for the three months ended June 30, 2020, from $7,985 for the prior year period. The decrease is primarily due to a period over period decrease in Pure Sunfarms’ salesnet liabilities of ($14,858) due to market driven price reductions and our share of VF Hemp second quarter losses of ($113). For information regarding the results of operations from our joint ventures, refer to “JV Cannabis Business” above and “Reconciliation of U.S. GAAP Results to Proportionate Results” below.

~~Income Tax (Provision) Recovery~~

For the three months ended June 30, 2020, we recorded an income tax provision of ($69) compared to an income tax recovery of $3,284 for the three months ended June 30, 2019. The difference is primarily due to the increase in sales. Pure Sunfarms and VF Hemp are both reported ~~post-tax~~ ~~and therefore do not factor into our tax calculation.~~

~~Net (Loss) Income~~

Net (loss) income for the three months ended June 30, 2020 and 2019 was ($119) and $3,716, respectively. The decrease was primarily due to the decrease of ($7,635) in our equity earnings from our unconsolidated entities, offset by an increase in tomato sales resulting from higher selling prices.$4,348.

Adjusted EBITDA

Adjusted EBITDA for the three months ended ~~June 30,~~March 31, 2021 and March 31, 2020 ~~decreased 51.2%~~was $2,534 and $4,868, respectively. The lower Adjusted EBITDA between periods was primarily due to ~~$2,268 from $4,644 for~~lower non-branded sales and lower gross margin in Q1 2021 as compared to Q1 2020. For the three months ended ~~June 30, 2019 due primarily to the decrease in equity earnings from Pure Sunfarms offset by higher sales. See the reconciliation of Adjusted EBITDA to net income in~~ ~~“Non-GAAP~~ ~~Measures - Reconciliation of Net Earnings to Adjusted EBITDA”.~~

~~Six months ended June 30,~~March 31, 2020, ~~compared to six months ended June 30, 2019~~

~~Sales~~

Sales for the six months ended June 30, 2020 increased $6,466, or 8.8%, to $79,685 compared to $73,219 for the six months ended June 30, 2019. The increase in sales was primarily due to higher selling prices for tomatoes during the six months ended June 30, 2020 compared to the same prior year period offset by production short falls. The average net selling price for all tomato pounds sold increased 22% for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 due primarily to an increase in the average selling price ~~of our commodity items, which includes beefsteak tomatoes and TOVs. The increase in selling prices~~ for non-branded sales was higher than the ~~commodity items was primarily due to a supply shortage mostly stemming from the effects of~~ ~~COVID-19~~ for most of the first half of 2020. Pepper prices increased 20% and pepper pounds increased 30% when compared to the same prior year period. Cucumber prices remained flat and cucumber pounds decreased (13%) for the sixthree months ended ~~June 30,~~March 31, 2020 as ~~compared to~~ the ~~same prior year period.~~wholesale market faced oversaturation in 2021.

~~A summary of sales by product group in our greenhouse produce business, follows:~~

   For the six months ended
June 30,
Percent of Sales by Product Group
   2020 2019
Tomatoes
   86 % 85 %
Peppers
   9 % 5 %
Cucumbers
   5 % 10 %


   100 % 100 %

~~Cost of Sales~~

Cost of sales for the six months ended June 30, 2020 only decreased ($123), or less than (1%), to $75,391 from $75,514 for the six months ended June 30, 2019 due to a higher cost per pound resulting from fewer pounds sold.

~~Selling, General and Administrative Expenses~~

Selling, general and administrative expenses for the six months ended June 30, 2020 decreased ($454), or (5.5%), to $7,734 from $8,188 for the six months ended June 30, 2019. The decrease was primarily due to reductions in employee related expenses, accounting fees and travel expenses offset by an increase in legal expense related primarily to public company filings and the first quarter Settlement Agreement, as well as increases in other public company expenses.

~~Share-based Compensation~~

Share-based compensation expense for the six months ended June 30, 2020 decreased ($1,140), or (57.1%), to $857 from $1,997 for the six months ended June 30, 2019. The decrease in share-based compensation expense was primarily due to the vesting of performance shares earned related to developments in Pure Sunfarms in 2019.

~~Interest Expense~~

Interest expense for the six months ended June 30, 2020 decreased ($389), or (28.5%), to $974 from $1,363 for the six months ended June 30, 2019. The decrease was due to lower interest rates as well as lower debt balances.

~~Interest Income~~

Interest income for the six months ended June 30, 2020 and 2019 was $476 and $347, respectively. The increase was due to the VFH grid loan having a higher balance at June 30, 2020 as compared to June 30, 2019.

~~(Loss) Gain on Disposal of Assets~~

The Company recognized a loss on disposal of assets of ($6) for the six months ended June 30, 2020 compared to a gain of $13,564 in the prior year period. The 2019 gain was due to the contribution of Delta 2 assets to Pure Sunfarms in March 2019. The gain represents the difference between our book value of the assets contributed and the CA$25,000 fair market value of stock received in PSF.

~~Income Tax Recovery (Provision)~~

For the six months ended June 30, 2020, we recorded an income tax recovery of $943 compared to an income tax provision of ($1,152) for the six months ended June 30, 2019. The improvement was primarily due to a $13,564 gain on disposal of assets arising from the contribution of our Delta 2 assets to Pure Sunfarms during the six months ended June 30, 2019. Pure Sunfarms and VF Hemp are both reported ~~post-tax~~ ~~and therefore do not factor into our tax calculation.~~

~~Equity Earnings from Unconsolidated Entities~~

Equity earnings from our unconsolidated entities decreased (66.2%) to $3,579 for the six months ended June 30, 2020, from $10,593 for the same prior year period. The decrease was primarily due to a period over period decrease in Pure Sunfarms’ sales of ($12,522) offset by a $4,348 gain resulting from the outcome of the March 2, 2020 Settlement Agreement between PSF, Emerald Health and us, of which $2,496 was our share of that income, and our share of VF Hemp losses of ($415). For information regarding the results of operations from our joint ventures, refer to “JV Cannabis Business” above and “Reconciliation of U.S. GAAP Results to Proportionate Results” below.

~~Net Income (Loss)~~

Net income (loss) for the six months ended June 30, 2020 and 2019 was $4,071 and $10,182, respectively. The decrease was mainly due to a decrease of ($7,014) in our equity earnings from our unconsolidated entities offset by an increase in sales of $6,466 and a gain on settlement of $4,681 recognized during the six months ended June 30, 2020, compared to a gain on disposal of assets of $13,564 recognized during the six months ended June 30, 2019.

~~Adjusted EBITDA~~

Adjusted EBITDA for the six months ended June 30, 2020 decreased ($2,626), or (43.8%), to $3,364 from $5,990 for the six months ended June 30, 2019 due primarily to the decrease in equity earnings from Pure Sunfarms offset by higher produce sales and earnings. See the reconciliation of Adjusted EBITDA to net income in ~~“Non-GAAP~~ ~~Measures - Reconciliation of Net Earnings to Adjusted EBITDA”.~~

Liquidity and Capital Resources

Capital Resources

At ~~June 30, 2020, the~~March 31, 2021, we had ~~$9,568~~$131,696 in cash and ~~$24,788~~$165,423 of working capital, and at December 31, 2020, we had $21,640 in cash and $29,528 of working capital. We expect to utilize cash-on-hand and provide or obtain adequate financing to maintain and improve our property, plant and equipment, to fund working capital produce needs and invest in Pure Sunfarms for the next twelve months from cash flows from operations, and, as needed, from additional borrowings under the Credit Facilities (as defined below) or additional equity or debt financing.

(in thousands of U.S. dollars unless otherwise noted)    Maximum    Outstanding
June 30, 2020
Operating loan
   CA$ 13,000    $ 4,000
Term loan
   $ 29,766    $ 29,766
VFCE loan
   CA$ 1,317    CA$ 1,317

(in thousands of U.S. dollars unless otherwise noted)	Maximum		Outstanding March 31, 2021
Operating Loan⁽¹⁾	C$	13,000	$	—
Term Loan	$	28,198	$	28,198
Pure Sunfarms Loans	C$	46,990	C$	46,990
VFCE Loan	C$	995	C$	995

(1)

The Operating Loan was amended on May 7, 2021 with a maximum line of credit of C$10,000. See “Operating Loan” below.

~~At June 30, 2020 we had a~~The Company’s borrowings under the FCC Term Loan, the Operating Loan and VFCE Borrowings (collectively the “Credit Facilities”), excluding Pure Sunfarms borrowings, are subject to certain positive and negative covenants, including debt ratios, and the Company is required to maintain certain minimum working capital. As of March 31, 2021, the Company was in compliance with all of its covenants under its Credit Facilities.

Accrued interest payable on the Credit Facilities and Pure Sunfarms Loans as of March 31, 2021 and December 31, 2020 was $177 and $189, respectively, and these amounts are included in accrued liabilities in the interim statements of financial position.

Term Loan

The Company has a term loan financing agreement with the Farm Credit Canada (“FCC”), a Canadian creditor (“FCC Term Loan”). The non-revolving variable rate term loan ~~had~~has a maturity date of April 1, 2025 and a balance of ~~$29,766~~$28,198 on March 31, 2021 and $28,690 as of ~~June 30,~~December 31, 2020. The outstanding balance is repayable by way of monthly installments of principal and interest, with the balance and any accrued interest to be paid in full on April 1, 2025. Effective August 1, 2020, monthly principal payments were reduced to $164 from $257. As of ~~June 30, 2020,~~March 31, 2021 and December 31, ~~2019,~~2020, borrowings under the FCC Term Loan agreement were subject to an interest rate of ~~4.98%~~3.766% and ~~6.391%,~~3.79% per annum, respectively.

~~We are also party to a variable rate line of credit agreement with Bank of Montreal (“BMO”) that has a maturity date of May 31, 2021 (the “Operating Loan” and together with~~As collateral for the FCC Loan, the “Credit Facilities”). The Operating Loan is subject to margin requirements stipulated by the bank based on produce sales. As at June 30, 2020 and 2019 there was $4,000 and $2,000, respectively, drawn on the Operating Loan, which is available to a maximum of CA$13,000, less outstanding letters of credit of US$150 and CA$38.

~~Our subsidiary VFCE has a loan agreement with a Canadian Chartered Bank that includes a~~ ~~non-revolving~~ fixed rate loan of CA$3.0 million with a maturity date of June 2023 and fixed interest rate of 4.98%. As of June 30, 2020, and December 31, 2019, the balance was US$882 and US$1,066, respectively. The loan agreement also includes an uncommitted, ~~non-revolving~~ ~~credit facility for up to CA$300 to cover Letters of Guarantee issued by the bank on behalf of the Company, with a maximum term of 365 days, renewable annually.~~

~~As security for the FCC~~Term Loan, the Company has provided promissory notes, a first mortgage on the VFF-owned greenhouse properties (excluding the Delta 32 and Delta 23 greenhouse facilities), and general security agreements over its assets. In addition, the Company has provided full recourse guarantees and has granted security ~~therein.~~interests in respect of the FCC Term Loan. The carrying value of the assets and securities pledged as collateral as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was ~~$168,378~~$207,762 and ~~$155,548,~~$86,664, respectively.

Operating Loan

The Company has a line of credit agreement with a Canadian chartered bank (“Operating Loan”). The revolving Operating Loan has a line of credit up to C$10,000, as amended on May 7, 2021, less outstanding letters of credit totaling US$150 and C$38 and includes variable interest rates with a maturity date of May 7, 2024. The Operating Loan is subject to margin requirements stipulated by the bank. As of March 31, 2021, there was no amount drawn on this loan, and as of December 31, 2020, the amount drawn on this facility was US$2,000.

As ~~security~~collateral for the Operating Loan, the Company has provided promissory notes and a first priority security interest over its accounts receivable and inventory. In addition, the Company has granted full recourse guarantees and security therein. The carrying value of the assets pledged as collateral as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 was ~~$27,035~~$25,033 and ~~$24,915,~~$23,443, respectively.

~~Our borrowings are subject to certain positive~~VFCE Loan

VFCE has a loan agreement with a Canadian chartered bank that includes a non-revolving fixed rate loan (“VFCE Loan”) of C$3.0 million with a maturity date of June 2023 and ~~negative covenants, including debt ratios, and we are required to maintain certain minimum working capital. In December 2019, we received~~ a ~~waiver for our annual debt service coverage and debt to EBITDA covenants under its Term Loan.~~fixed interest rate of 4.98% per annum. As of ~~June 30, 2020, the Company was in compliance with all of its other Credit Facility covenants under its Credit Facilities.~~

~~Accrued interest payable on the credit facilities and loans as of June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020, the balance of the VFCE Loan was ~~$111~~US$730 and ~~$162,~~US$797, respectively. ~~These amounts are included~~The loan agreement also includes an uncommitted, non-revolving credit facility for up to C$300 to cover Letters of Guarantee issued by the bank on behalf of the Company, with a maximum term of 365 days, renewable annually. The loan agreement also includes an uncommitted credit facility for up to C$700 to support financing of certain capital expenditures (“VFCE Credit Facility”). The Company received an initial advance of C$250 in ~~accrued liabilities~~October 2017. Each advance is to be repaid on a five-year, straight-line amortization of principal, repaid in monthly installments of principal plus interest at an interest rate of C$ prime rate plus 200 basis points. As of March 31, 2021 and December 31, 2020, the ~~condensed consolidated interim statements of financial position.~~outstanding borrowings under the VFCE Credit Facility were US$60 and US$69, respectively (such borrowings, together with the VFCE Loan, the ”VFCE Borrowings”).

~~In 2019,~~Pure Sunfarms Loans

On March 15, 2021, Pure Sunfarms entered into the Third Amended and Restated Credit Agreement (the “Third Amended and Restated PSF Credit Agreement) with Farm Credit Canada (“FCC”) and two Canadian chartered banks, which extended the maturity date of each of the PSF Revolving Line of Credit, PSF Non-Revolving Facility and the PSF Term Loan (each as defined below) through February 7, 2024, included an unlimited guarantee from Village Farms and changed certain financial covenants. The Third Amended and Restated PSF Credit Agreement amends and updates the previous three loan facilities.

The first loan facility is a revolving line of credit (the “PSF Revolving Line of Credit”) with two separate C$7,500 commitments from each of the Canadian chartered banks. Each lender established a revolving line of credit severally and not jointly whereby Pure Sunfarms may receive advances in equal proportionate amounts from each lender. The advances shall be used for working capital purposes, general corporate purposes and capital expenditures, of which capital expenditures may not exceed C$7,500 in aggregate use of the outstanding advances. Interest is payable at the Canadian prime rate plus an applicable margin per annum, payable monthly. The PSF Revolving Line of Credit had no outstanding balance as of March 31, 2021 and December 31, 2020.

The second loan facility is a credit agreement with ~~BMO,~~a Canadian chartered bank, as agent and lead lender, and FCC, as lender, in respect of a ~~CA$20,000~~C$17,000 secured non-revolver term loan (the “PSF ~~Credit Facility”)~~Non-Revolving Facility). In April 2020, Pure Sunfarms expanded the PSF Credit Facility with its existing lender to CA$59.0 million, including accordion provisions of CA$22.5 million. As of June 30, 2020, the outstanding amount on the loan was CA$30.5 million.

The PSF ~~Credit~~Non-Revolving Facility, which matures on February 7, ~~2022,~~2024, is secured by the Delta 2 and 3 greenhouse facilities and contains customary financial and restrictive covenants. The ~~Company is not a party to~~purpose of the PSF ~~Credit~~Non-Revolving Facility ~~but has guaranteed up~~is to ~~CA$10~~refinance our Delta 3 greenhouse and provide funds to upgrade and retrofit the D2 Property. The outstanding amount on the PSF Non-Revolving Facility was US$13,177 on March 31, 2021 and US$13,385 on December 31, 2020.

The third loan facility is a C$25 million term loan (the “PSF Term Loan”) at Canadian prime interest rate plus an applicable margin, repayable in ~~connection~~quarterly payments equal to 2.50% of the outstanding principal amount starting June 30, 2021 and maturing February 7, 2024. Advances under the PSF Term Loan shall be used to finance the upgrade and retrofit of the Delta 2 greenhouse to render it suitable for cannabis cultivation as well as any funds necessary for capital expenditures on the D3 Property’s processing facility. The outstanding amount on the PSF Term Loan was US$19,713 on March 31, 2021 and US$16,535 on December 31, 2020.

On December 20, 2020, Pure Sunfarms entered into a C$6,250 non-revolving demand loan at prime interest plus 3.75% per annum with a Canadian chartered bank with the ~~PSF Credit Facility.~~financial support of the Business Development Bank of Canada (the “BDC Facility”). The BDC Facility, provided as part of COVID-19 relief, requires interest only payments monthly for the first twelve months and matures on December 31, 2031. Commencing on December 31, 2021, Pure Sunfarms will repay the outstanding principal amount in equal monthly installments. The outstanding amount on the BDC Facility was US$4,989 on March 31, 2021 and US$4,905 on December 31, 2020.

Pure Sunfarms is required to comply with financial covenants measured quarterly. As of March 31, 2021, Pure Sunfarms was in compliance with the financial covenants.

Emerald Promissory Note

The Company had a note payable due to Emerald of C$19,900 (US$15,314), plus accrued interest included in the statements as of December 31, 2020 that the Company originally issued to Emerald as partial consideration for the November 2, 2020 acquisition of Pure Sunfarms. The note and accrued interest were repaid to Emerald in full on February 5, 2021.

Equity Offerings

The Company closed equity offerings on ~~October 22, 2019 and~~ March 24, ~~2020. The October 22, 2019 public offering raised net proceeds of CA$26,934 through the issuance of 3,059,000 Common Shares at a price of CA$9.40 per Common Share.~~2020, September 10, 2020, and January 20, 2021. The March 24, 2020 public offering raised ~~net~~gross proceeds of ~~CA$10,711~~C$11,500 through the issuance of 3,593,750 Common Shares at a price of ~~CA$~~C$3.20 per Common Share. The September 10, 2020 offering raised gross proceeds of US$49,800 through the issuance of 9,396,226 Units with each Unit consisting of one Common Share at a price of US$5.30 per share and one-half of a Warrant at an exercise price of US$5.80, and on January 20, 2021, Village Farms completed a registered direct offering for the purchase and sale of an aggregate 10,887,097 Common Shares at a purchase price of US$12.40 per Common Share for gross proceeds of approximately US$135 million.

Summary of Cash Flows


	For the six months ended June 30,						For the three months ended March 31,
(in Thousands)	2020			2019			2021			2020
Cash beginning of period	$	11,989		$	11,920		$	25,679		$	11,989
Net cash flow provided by (used in):
Net cash flow provided by/(used in):
Operating activities		2,145			(9,437	)		(14,436	)		(535	)
Investing activities		(12,290	)		(6,489	)		(5,211	)		(6,322	)
Financing activities		7,725			15,712			129,577			8,428

Net cash increase (decrease) for the period		(2,420	)		(214	)		109,930			1,571
Effect of exchange rate changes on cash		(1	)		—			178			(2	)

Cash, end of the period	$	9,568		$	11,706		$	135,787		$	13,558

Operating Activities

For the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ cash flows used in operating activities before changes in non-cash working capital totaled ($~~1,816)~~4,733) and ($~~7,594)~~2,760), respectively. The ~~improvement is~~decline in cash flows from operating activities between periods was primarily due to lower operating results of both Pure Sunfarms and the ~~$4,494 repayment of an outstanding receivable due from PSF, a combined increase of $4,962 accounts payable and accrued expenses due to an increase~~produce business in ~~purchasing from our third party suppliers, offset by a ($2,386) increase in accounts receivable due to higher sales and $1,442 decrease in accrued taxes payable.~~Q1 2021.

Investing Activities

For the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ cash flows used in investing activities were ($~~12,290)~~5,211) and ($~~6,489)~~6,322), respectively. ~~The increase is~~Q1 2021 investing activities primarily ~~due~~consist of a ($500) investment in Altum and ($4,706) of capital expenditure expenses, of which ($3,789) was primarily for the Pure Sunfarms Delta 2 greenhouse transition to ~~an increase~~cannabis and ($916) for our produce operations. Q1 2020 investing activities consist primarily of ($~~11,700) in~~6,063) of additional ~~investments made~~investment in Pure Sunfarms ~~offset by $5,608~~and ($259) of ~~loans made to VF Hemp and AVGG Hemp during the six months ended June 30, 2019, as no loans were provided during the six months ended June 30, 2020.~~capital expenditures for our produce operations.

Financing Activities

For the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ cash flows provided by financing activities were ~~$7,725~~$129,577 and ~~$15,712,~~$8,428, respectively. ~~The decrease is~~For the three months ended March 31, 2021, cash flows provided by financing activities primarily ~~due to higher repayments on borrowings~~consisted of ~~($943) and ($5,971)~~$127,489 of ~~lower equity~~net proceeds ~~received~~ from the issuance ~~common stock during~~of Common Shares, $17,663 in proceeds from the ~~six~~exercise of warrants from the September 2020 registered direct offering and the ($15,498) payment of the Emerald Promissory Note. For the three months ended ~~June 30,~~March 31, 2020, ~~when compared to~~cash flows provided by financing activities primarily consisted of the ~~same prior year period.~~$7,324 generated from the issuance of Common Shares, net of issuance costs, and $1,125 of proceeds from borrowings net of repayments.

Contractual Obligations and Commitments

~~During the six months ended June 30, 2020, we made equity contributions to Pure Sunfarms totaling CA$16,000 (US$11,713).~~

Information regarding our contractual obligations as of ~~June 30, 2020~~March 31, 2021 is set forth in the table below:


Financial liabilities	Total		1 year		2-3 years		4-5 years		More than 5 years		Total		1 year		2-3 years		4-5 years		More than 5 years
Long-term debt	$	32,204	$	2,394	$	4,830	$	4,120	$	20,860	$	73,040	$	5,575	$	38,502	$	24,352	$	4,611
Line of credit		4,000		4,000		—		—		—		—		—		—		—		—
Trade payables		9,849		9,849		—		—		—		20,785		20,785		—		—		—
Accrued liabilities		7,037		7,037		—		—		—		21,077		21,077		—		—		—
Operating lease liabilities		5,098		1,282		2,179		1,076		561
Capital lease liabilities		62		44		18

Lease liabilities												3,716		1,158		1,969		463		126
Other liabilities												23,798		—		23,798		—		—
Total	$	58,250	$	24,606	$	7,027	$	5,196	$	21,421	$	142,416	$	48,595	$	64,269	$	24,815	$	4,737

~~Off-Balance~~ ~~Sheet Arrangements~~As of March 31, 2021, Pure Sunfarms had a service agreement with an unrelated party. In the event Pure Sunfarms terminates the agreement, Pure Sunfarms would be required to pay the counterparty a C$1.0 million termination fee. This is considered a commitment.

~~The Company does not have any~~ ~~off-balance~~ ~~sheet arrangements.~~

Non-GAAP Measures

References in this ~~report~~MD&A to “Adjusted EBITDA” are to earnings (including the equity in earnings of ~~the~~ Pure ~~Sunfarms)~~Sunfarms and VFH) before interest, taxes, depreciation, and amortization (“EBITDA”), as further adjusted to exclude foreign currency exchange gains and losses on translation of long-term debt, unrealized gains on the changes in the value of derivative instruments, ~~stock~~share-based compensation, ~~and~~ gains and losses on asset sales and ~~adjusts for~~ the ~~difference~~other adjustments set forth in ~~accounting treatment of Pure Sunfarms, which we believe is necessary to reflect~~ the ~~true economic value of our interest in Pure Sunfarms.~~table below. Adjusted EBITDA is a cash flow measure that is not recognized under GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, Adjusted EBITDA may not be comparable to similar measures presented by other issuers. Investors are cautioned that Adjusted EBITDA should not be construed as an alternative to net income or loss determined in accordance with GAAP as an indicator of our performance or to cash flows from operating, investing, and financing activities as measures of liquidity and cash flows. Management believes that Adjusted EBITDA is an important measure in evaluating the historical performance of the Company.

We also present Adjusted EBITDA, earnings per share and diluted earnings per share on a proportionate segment basis. Each of the components of Adjusted EBITDA, on a proportionate segment basis (which include our proportionate share of the Pure Sunfarms and ~~VF Hemp~~VFH operations), are presented in the table Reconciliation of GAAP to Proportionate Results below. We believe that the ability of investors to assess our overall performance may be improved by the disclosure of proportionate segment Adjusted EBITDA, earnings per share and diluted earnings per share, given that our joint ventures represent a significant percentage of our net income.

Reconciliation of Net Income to Adjusted EBITDA

The following table reflects a reconciliation of net income to Adjusted EBITDA, as presented by the Company:

													For the three months ended March 31,
(in thousands of U.S. dollars)	For the three months ended June 30,						For the six months ended June 30,						2021 ⁽¹⁾			2020 ⁽¹⁾
	2020			2019			2020			2019
Net (loss) income	$	(119	)	$	3,716		$	4,071		$	10,182		$	(7,382	)	$	4,190
Add:
Amortization		1,491			1,964			3,021			3,804			3,412			1,530
Foreign currency exchange (gain) loss		(530	)		(243	)		396			(521	)
Foreign currency exchange loss														504			926
Interest expense, net		344			458			498			1,016			738			154	��
Provision for (recovery of) income taxes		69			(3,284	)		(943	)		1,152
Stock based compensation		328			701			857			1,997
Recovery of income taxes														(1,839	)		(1,012	)
Share-based compensation														1,998			529
Interest expense for JVs		103			230			396			230			14			293
Amortization for JVs		377			415			678			711			34			301
Foreign currency exchange (gain) loss for JVs		(17	)		16			85			(13	)
Provision for income taxes from JVs		222			3,178			1,491			4,264
Foreign currency exchange loss for JVs														—			102
Provision for income taxes for JVs														—			1,269
Purchase price adjustment ⁽²⁾														2,925			—
Gain on settlement agreement(3)		—			—			(4,681	)		—			—			(4,681	)
Gain on settlement of net liabilities from JV		—			—			(2,496	)		—			—			(2,496	)
Gain on disposal of assets		—			—			(9	)		(13,564	)		—			(9	)
Adjustment to reflect true economic value for Pure Sunfarms⁽¹⁾		—			(2,507	)					(3,268	)

Adjusted EBITDA	$	2,268		$	4,644		$	3,364		$	5,990
Adjusted EBITDA ⁽⁴⁾													$	404		$	1,096
Adjusted EBITDA for JVs ^{(See table below)}	$	1,034		$	9,317		$	3,717		$	12,520		$	(79	)	$	2,683
Adjusted EBITDA excluding JVs^(produce)	$	1,234		($	4,673	)	$	(353	)	$	(6,530)
Adjusted EBITDA excluding JVs													$	483		$	(1,587	)

Notes:

Breakout of JV Adjusted EBITDA
(in thousands of U.S. dollars)
   For the three months
ended June 30,    For the six months
ended June,
   2020    2019    2020    2019
Pure Sunfarms Adjusted EBITDA
   $ 1,076    $ 9,449    $ 3,854    $ 12,675
VFH Adjusted EBITDA
   (42 )    (132 )    (137 )    (155 )








Total JV Adjusted EBITDA
   $ 1,034    $ 9,317    $ 3,717    $ 12,520

⁽¹⁾

~~The GAAP treatment~~(1)

For the three months ended March 31, 2021, Pure Sunfarms is fully consolidated in the financial results of the Company. For the three months ended March 31, 2020, our ~~equity earning~~share of Pure Sunfarms earnings is ~~different than under International Financial Reporting Standards (“IFRS”). Under GAAP the Emerald shares held~~reflected in escrow are not considered issued until paid for pursuant to the GAAP concept of ‘hypothetical liquidation’. As a result, our ownership percentage for the three and six months ended June 30, 2019 was 61.4% and 60.8%, respectively, compared to our economic interest under IFRS of 50% for the same periods.equity earnings from unconsolidated entities.

(2)

The purchase price adjustment reflects the non-cash accounting charge to cost of sales resulting from the revaluation of Pure Sunfarms’ inventory to fair value at the acquisition date.

(3)

See “Results of Operations – Consolidated Results – Gain on Settlement Agreement” above.

(4)

Adjusted EBITDA is not a recognized earnings measure and does not have a standardized meaning prescribed by GAAP. Therefore, Adjusted EBITDA may not be comparable to similar measures presented by other issuers. Management believes that Adjusted EBITDA is a useful supplemental measure in evaluating the performance of the Company. Adjusted EBITDA includes the Company’s majority non-controlling interest in Pure Sunfarms (through November 1, 2020), and 65% interest in VFH.

Breakout of JV Adjusted EBITDA	For the three months ended March 31,
(in thousands of U.S. dollars)	2021			2020
Pure Sunfarms Adjusted EBITDA	$	—		$	2,778
VFH Adjusted EBITDA		(79	)		(95	)
Total JV Adjusted EBITDA	$	(79	)	$	2,683

Reconciliation of U.S. GAAP Results to Proportionate Results

The following tables are a reconciliation of the GAAP results to the proportionate results (which include our proportionate share of Pure Sunfarms and VF Hemp operations). The tables reflect the full statements of income for Pure Sunfarms (Cannabis) and VFH (Hemp) multiplied by the ownership percentage of the Company (versus presenting the results of these joint ventures in Equity Earnings from Unconsolidated Entities):

   For the three months ended June 30, 2020
   Produce    Pure
Sunfarms⁽¹⁾    Hemp⁽¹⁾    Total
Sales
   $ 47,573    $ 5,509    $ —      $ 53,082
Cost of sales
   (44,044 )    (3,678 )    —      (47,722 )
Selling, general and administrative expenses
   (3,813 )    (1,086 )    (170 )    (5,069 )
Stock compensation expense
   (328 )    —      —      (328 )
Other income (expense) net
   212    (60 )    57    209
Provision for income taxes
   (69 )    (222 )    —      (291 )
Net (loss) income
   $ (469 )    $ 463    $ (113 )    $ (119 )
Adjusted EBITDA ⁽²⁾
   $ 1,234    $ 1,076    $ (42 )    $ 2,268
(Loss) earnings per share – basic
   $ (0.01 )    $ 0.01    $ (0.00 )    $ (0.00 )
(Loss) earnings per share – diluted
   $ (0.01 )    $ 0.01    $ (0.00 )    $ (0.00 )
   For the three months ended June 30, 2019
   Produce    Pure
Sunfarms ⁽¹⁾    Hemp⁽¹⁾    Total
Sales
   $ 41,329    $ 15,066    $ —      $ 56,395
Cost of sales
   (44,299 )    (2,474 )    —      (46,773 )
Selling, general and administrative expenses
   (3,949 )    (1,115 )    (120 )    (5,184 )
Stock compensation expense
   (701 )    —      —      (701 )
Other income (expense) net
   67    (194 )    —      (127 )
Recovery of (provision for) income taxes
   3,284    (3,178 )    —      106
Net (loss) income
   ($ 4,269 )    $ 8,105    ($ 120 )    $ 3,716
Adjusted EBITDA ⁽²⁾
   ($ 4,673 )    $ 9,449    ($ 132 )    $ 4,644
(Loss) earnings per share – basic
   $ (0.09 )    $ 0.17    $ 0.00    $ 0.08
(Loss) earnings per share – diluted
   $ (0.09 )    $ 0.16    $ 0.00    $ 0.07
   For the six months ended June 30, 2020
   Produce    Pure
Sunfarms⁽¹⁾    Hemp⁽¹⁾    Total
Sales
   $ 79,685    $ 12,951    $ 98    $ 92,734
Cost of sales
   (75,391 )    (7,235 )    (120 )    (82,746 )
Selling, general and administrative expenses
   (7,734 )    (2,434 )    (287 )    (10,455 )
Stock compensation expense
   (857 )    —      —      (857 )
Gain on settlement agreement
   4,681    —      —      4,681
Gain on settlement of net liabilities
   —      2,496    —      2,496
(Loss) gain on disposal of assets
   (6 )    5    10    9
Other expense, net
   (829 )    (298 )    (116 )    (1,243 )
Recovery of (provision for) income taxes
   943    (1,491 )    —      (548 )
Net income (loss)
   $ 492    $ 3,994    $ (415 )    $ 4,071
Adjusted EBITDA ⁽²⁾
   $ (353 )    $ 3,854    $ (137 )    $ 3,364
Earnings (loss) per share – basic
   $ 0.01    $ 0.07    $ (0.01 )    $ 0.07
Earnings (loss) per share – diluted
   $ 0.01    $ 0.07    $ (0.01 )    $ 0.07
   For the six months ended June 30, 2019
   Produce    Pure
Sunfarms ⁽¹⁾    Hemp⁽¹⁾    Total
Sales
   $ 73,219    $ 21,794    $ —      $ 95,013
Cost of sales
   (75,514 )    (4,925 )    —      (80,439 )
Selling, general and administrative expenses
   (8,188 )    (1,698 )    (154 )    (10,040 )

	For the Three months ended March 31, 2021
	Produce			Cannabis ⁽¹⁾			Hemp⁽¹⁾			Total
Sales	$	34,936		$	17,460		$	—		$	52,396
Cost of sales		(34,841	)		(15,248	)		(48	)		(50,137	)
Selling, general and administrative expenses		(4,126	)		(3,966	)		(65	)		(8,157	)
Share-based compensation		(904	)		(1,094	)		—			(1,998	)
Other expense, net		(681	)		(630	)		(14	)		(1,325	)
Recovery of income taxes		1,195			644			—			1,839
Net loss	$	(4,421	)	$	(2,834	)	$	(127	)		(7,382	)
Adjusted EBITDA⁽²⁾	$	(2,051	)	$	2,534		$	(79	)	$	404
Losses per share – basic	$	(0.06	)	$	(0.04	)	$	(0.00	)	$	(0.10	)
Losses per share – diluted	$	(0.06	)	$	(0.04	)	$	(0.00	)	$	(0.10	)

   For the six months ended June 30, 2019
   Produce    Pure
Sunfarms ⁽¹⁾    Hemp⁽¹⁾    Total
Stock compensation expense
   (1,997 )    —      —      (1,997 )
Gain on disposal of assets
   13,564    —      —      13,564
Other expense, net
   (343 )    (160 )    —      (503 )
Provision for income taxes
   (1,152 )    (4,264 )    —      (5,416 )
Net (loss) income
   $ (411 )    $ 10,747    $ (154 )    $ 10,182
Adjusted EBITDA ⁽²⁾
   $ (6,530 )    $ 12,675    $ (155 )    $ 5,990
(Loss) earnings per share – basic
   $ (0.01 )    $ 0.22    $ (0.00 )    $ 0.21
(Loss) earnings per share – diluted
   $ (0.01 )    $ 0.21    $ (0.00 )    $ 0.20

	For the three months ended March 31, 2020
	Produce			Cannabis⁽¹⁾			Hemp ⁽¹⁾			Total
Sales	$	32,112		$	7,442		$	98		$	39,652
Cost of sales		(31,347	)		(3,557	)		(120	)		(35,024	)
Selling, general and administrative expenses		(3,921	)		(1,348	)		(117	)		(5,386	)
Share-based compensation		(529	)		—			—			(529	)
Gain on settlement agreement		4,681			—			—			4,681
Gain on settlement of net liabilities		—			2,496			—			2,496
(Loss) gain on disposal of assets		(6	)		5			10			9
Other expense, net		(1,041	)		(238	)		(173	)		(1,452	)
Recovery of (provision for) income taxes		1,012			(1,269	)		—			(257	)
Net income (loss)	$	961		$	3,531		$	(302	)	$	4,190
Adjusted EBITDA ⁽²⁾	$	(1,587	)	$	2,778		$	(95	)	$	1,096
Earnings (losses) per share – basic	$	0.02		$	0.07		$	(0.01	)	$	0.08
Earnings (losses) per share – diluted	$	0.02		$	0.07		$	(0.01	)	$	0.08

Notes:

~~(1)~~

(1)

The adjusted consolidated financial results have been adjusted to include our share of sales and expenses from Pure Sunfarms and ~~Hemp~~VFH on a proportionate accounting basis, on which management bases its operating decisions and performance evaluation. GAAP does not allow for the inclusion of the joint ventures on a proportionate basis. These results include additional non-GAAP measures such as Adjusted EBITDA.

The adjusted results are not generally accepted measures of financial performance under GAAP. Our method of calculating these financial performance measures may differ from other companies and accordingly, they may not be comparable to measures used by other companies.

~~(2)~~

(2)

Adjusted EBITDA is not a recognized earnings measure and does not have a standardized meaning prescribed by GAAP. Therefore, Adjusted EBITDA may not be comparable to similar measures presented by other issuers. ~~See~~ ~~“Non-GAAP~~ ~~Measures”.~~ Management believes that Adjusted EBITDA is a useful supplemental measure in evaluating the performance of the Company. Consolidated Adjusted EBITDA includes our majority non-controlling interest Pure Sunfarms (through November 1, 2020), and our 65% interest in ~~VF Hemp.~~VFH.

New Accounting Pronouncements Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to debt instruments, derivatives, and other contracts that reference LIBOR or other reference rates expected to be discontinued as a result of reference rate reform. This guidance is optional and may be elected through December ~~2019,~~31, 2022 using a prospective application on all eligible contract modifications. The Company has a line of credit that incorporates LIBOR as a referenced interest rate. It is difficult to predict what effect, if any, the ~~FASB issued ASU~~ ~~2019-12,~~ “~~Income Taxes (Topic 740): Simplifying~~phase-out of LIBOR and the ~~Accounting for Income Taxes~~~~.” ASU~~ ~~2019-12~~ ~~simplifies~~use of alternative benchmarks may have on the ~~accounting for income taxes by removing~~Company’s business or on the overall financial markets. The Company has not adopted any of the optional expedients or exceptions ~~within~~through March 31, 2021 but will continue to evaluate the general principles of Topic 740 regarding the calculation of deferred tax liabilities, the incremental approach for intraperiod tax allocation, and calculating income taxes in an interim period. In addition, the ASU adds clarifications to the accounting for franchise tax (or similar tax). which is partially based on income, evaluating tax basis of goodwill recognized from a business combination, and reflecting the effectpossible adoption of any ~~enacted changes in tax laws~~such expedients or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The ASU is effective for fiscal years beginning after December 15, 2020 and will be applied either retrospectively or prospectively based upon the applicable amendments. Early adoption is permitted. We are currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.exceptions.

Critical Accounting Estimates and Judgments

Our discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Interim Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses and related disclosure of contingent assets and liabilities.

We believe that the estimates, assumptions and judgments involved in the accounting policies described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Actual results could differ from the estimates we use in applying our critical accounting policies. We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

~~Item 3.~~

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk on its long-term debt, for which the interest rates charged fluctuate based on the 90-day LIBOR rate. If interest rates had been 50 basis points higher (lower), the net income ~~during~~for the ~~periods~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ would have been ~~lower~~higher (lower) by ~~$40~~$81 and ~~$43,~~$40, respectively. This represents ~~$40~~$81 and ~~$43~~$40 in increased (decreased) interest expense for the ~~periods~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

While we cannot predict our ability to refinance existing debt or the significance of the impact that interest rate movements will have on our existing debt, management evaluates our financial position on an ongoing basis.

Foreign Exchange Risk

As of ~~June 30,~~March 31, 2021, and 2020, ~~and 2019,~~ the Canadian/U.S. foreign exchange rate was C$1.00 = US$~~0.7330~~0.7941 and C$1.00 = US$~~0.7636,~~0.7056, respectively. Assuming that all other variables remain constant, an increase of $0.10 in the Canadian dollar would have the following impact on the ending balances of certain statements of financial position items at ~~June 30,~~March 31, 2021 and March 31, 2020 ~~and June 30, 2019~~ with the net foreign exchange gain or loss directly impacting net income (loss).


	June 30, 2020			June 30, 2019			March 31, 2021			March 31, 2020
Financial assets
Cash and cash equivalents	$	260		$	837		$	1,365		$	1,179
Trade receivables		496			504			3,180			181
JV notes receivable		1,455			1,366			—			1,451
Inventories								3,998			—
Prepaid and deposits								764			—
Financial liabilities
Trade payables and accrued liabilities		(517	)		(693	)		(4,312	)		(266	)
Loan payable		(132	)		(176	)		(4,798	)		(142	)

Deferred tax liability								(2,209	)		—
Net foreign exchange gain (loss)	$	1,562		$	1,838		$	(2,012	)	$	2,403

Our exposure to foreign exchange risk and the impact of foreign exchange rates are monitored by the Company’s management but generally the Company tries to match its sales (trade receivables) and vendor payments (trade payables) such that the net impact is not material.

Other than the interest rate risk and foreign exchange risk discussed above, there have been no material changes ~~tour~~to our market risks from those disclosed in Part II, Item 7A of our Annual Report on Form 10-K.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the U.S. Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company’s Chief Executive Officer and Principal Financial and Accounting Officer evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the ~~Securities~~ Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and the Principal Financial and Accounting Officer concluded that, as of the end of the period covered by this Quarterly Report, the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

The Company’s management, including the Chief Executive Officer and Principal Financial and Accounting Officer, has reviewed the Company’s internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting during the quarter ended ~~June 30, 2020~~March 31, 2021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. – OTHER INFORMATION

Item 1.

Legal Proceedings

From time to time the Company is engaged in legal proceedings in the ordinary course of business. We do not believe any current legal proceedings are material to our business.

~~Item 1A.~~

Item 1A. Risk Factors

Our business, operations, and financial condition are subject to various risks and uncertainties. The risk factors described in Part I, Item 1A, “Risk Factors” contained in our Annual Report on Form 10K for the year ended December 31, ~~2019,~~2020, as filed with the SEC on ~~April 1, 2020,~~March 15, 2021 and amended on March 18, 2021, should be carefully considered, together with the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings filed with the SEC in connection with evaluating us, our business, and the forward-looking statements contained in this Quarterly Report on Form 10-Q. During the quarter ended ~~June 30, 2020,~~March 31, 2021, there have been no material changes from the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K, for the year ended December 31, 2019, except as described in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent developments relating to the outbreak of the Coronavirus pandemic ~~(“COVID-19”)”.~~2020.

Item 6.

Exhibits

The following exhibits are filed as part of, or incorporated by reference into, this report:


Exhibit Number		Description of Document

~~3.1~~ 10.1		~~By-laws~~ ~~amendment (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form~~ ~~8-K~~ ~~filed on June 25, 2020)~~

~~10.1~~		~~Employment~~Amended and Restated Credit Agreement ~~dated as of June 1, 2020,~~ by and between Village Farms ~~International, Inc.~~Canada Limited Partnership and ~~Stephen C. Ruffini (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form~~ ~~8-K~~ ~~filed on June 4, 2020)~~Village Farms, L.P., and Bank of Montreal, dated May 7, 2021.

~~10.2~~ 31.1		Employment Agreement, dated as of July 13, 2020, by and between Village Farms International, Inc. and Michael A. DeGiglio (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form ~~8-K~~ ~~filed on July 14, 2020)~~

~~31.1~~		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002.

31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002.

32.1		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002.

32.2		Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002.

101.INS		Inline XBRL Instance Document*Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document*Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document*Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document*


~~Exhibit~~ ~~Number~~		~~Description of~~ Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document^*

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document^*

*	~~In accordance with Rule 406T of Regulation~~ ~~S-T,~~
104		The cover page for the ~~XBRL related information in Exhibit 101 to this~~Company’s Quarterly Report on Form 10-Q ~~is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act,~~ has been formatted in Inline XBRL and ~~otherwise is not subject to liability under these sections.~~contained in Exhibit 101

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, thereunto duly authorized.


	VILLAGE FARMS INTERNATIONAL, INC.

	By:	/s/ Stephen C. Ruffini
		Name:	Stephen C. Ruffini

		Title:	Executive Vice President and Chief Financial Officer

		(Authorized Signatory and Principal Financial and Accounting Officer)
Date: ~~August 12, 2020~~May 10, 2021

3034

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