Emerald Health Therapeutics responded to "inaccurate allegations" made by Village Farms International in connection with their 50/50 joint venture, Pure Sunfarms ("PSF"), and updated the market on certain related matters.
Previously, Village Farms International announced that, following an equity payment default by Emerald Health Therapeutics pursuant to the Delta 2 option agreement involving Pure Sunfarms Corp., Village Farms notified Pure Sunfarms that it has exercised its rights under the Pure Sunfarms shareholders agreement to increase Village Farms' ownership position in Pure Sunfarms and advanced an equity payment to Pure Sunfarms of $5,940,000.
"In accordance with these agreements, Emerald was obligated to pay $5,940,000 to Pure Sunfarms on Nov. 1, 2019," the team with Village Farms explains. "Following Emerald's failure to make this equity payment, Pure Sunfarms issued a default notice to Emerald. Emerald nonetheless remained in default following the expiration of the contractual cure period earlier today."
However, Emerald Health replied: "Late yesterday evening Emerald received notice from Village Farms stating that Village Farms had advanced $5.94 million to PSF for additional equity. Village Farms claims that it has the right to acquire these shares under the PSF shareholders’ agreement. In fact, Village Farms has no such right. Despite Village Farms’ claims, Emerald continues to hold a full 50% ownership interest in PSF."
“We were shocked to receive this notice,” said Riaz Bandali, President and CEO of Emerald. “We can’t speculate on Village Farms’ motivation for making this irresponsible and inaccurate claim, but we want to reassure investors that there has been no change in ownership of PSF. We are disappointed at the aggressive approach of Village Farms in this matter; however, we continue to believe that cooler heads will prevail. Until then we will assertively defend our rights on behalf of our shareholders in the face of these unwarranted actions by Village Farms.”
Escrowed shares
Further to that, Village Farms has stated that "In conjunction with entering into the Delta 2 option agreement, certain shares of Pure Sunfarms were placed in escrow pursuant to an escrow agreement and were to be released to Emerald once it had made certain equity contributions to Pure Sunfarms."
"As a result of the above-described $5,940,000 payment default by Emerald, Village Farms has delivered written notice to the escrow agent pursuant to the escrow agreement to release for cancellation 5,940,000 shares in Pure Sunfarms that were being held in escrow for Emerald. Emerald, however, has delivered a written notice to the escrow agent which disputes any release from escrow of such Pure Sunfarms shares. Pending the resolution of Emerald's dispute under the escrow agreement, these 5,940,000 shares in Pure Sunfarms remain held in escrow. If these shares are ultimately cancelled by Pure Sunfarms, there will be a further increase in Village Farms' equity interest in Pure Sunfarms and a corresponding decrease in Emerald's equity interest."
To which, Emerald replied: "In connection with the exercise of PSF's option to acquire the Delta 2 facility from Village Farms, an option agreement (the "Delta 2 Option Agreement") was entered into among Emerald, Village Farms and PSF. Pursuant to the Delta 2 Option Agreement, Emerald agreed to advance an aggregate of $25 million to PSF. Additionally, certain shares of PSF issued to Emerald were placed in escrow with an escrow agent (the "Escrow Agent") and were to be released to Emerald upon payment by Emerald of amounts payable under the Delta 2 Option Agreement."
"Emerald has advanced a total of $17.41 million to PSF under the Delta 2 Option Agreement. Emerald was required to advance a further $5.94 million to PSF (the "Delta 2 Payment") on November 1, 2019; however, Emerald notified PSF that Emerald has decided to set-off the $5.94 million payment owed by Emerald to PSF against a portion of PSF’s debt under Emerald’s $13.0 million principal amount shareholder loan. Emerald has also delivered written notice to the Escrow Agent disputing the release of any of Emerald’s shares of PSF remaining in escrow and has notified the Escrow Agent that it must continue to hold the shares in escrow."
"In light of PSF’s actions, Emerald has formally demanded repayment from PSF of the entire amount of its $13.0 million principal amount shareholder loan, plus interest. Emerald’s demand for repayment of its shareholder loan was delivered to PSF this morning."
Supply agreement
With regards to the supply agreement between Emerald and PSF, Village Farms has commented: "As previously announced, pursuant to the terms of a supply agreement that Pure Sunfarms has with Emerald, Emerald has an obligation to purchase 40% of Pure Sunfarms' cannabis production at a fixed price, subject to the terms and conditions of the supply agreement. To the extent that Emerald does not fulfill its purchase obligation, Pure Sunfarms is able to sell that excess production to other parties in the open market. The supply agreement stipulates that Emerald is required to pay Pure Sunfarms the difference between the fixed price and the selling price realized from other parties. During the quarter ended Sept. 30, 2019, Emerald did not fulfill its purchase obligations and Pure Sunfarms sold the product on the open market to arm's length parties at prices lower than the fixed price in the supply agreement. As a result, under the terms of the Supply Agreement, Pure Sunfarms billed Emerald for the difference which amounted to approximately C$7.2 million. On Oct. 15, 2019, Emerald issued a press release that indicated they do not agree that they have any liability with respect to these amounts."
Thus, Emerald responded: "Under its supply agreement with PSF, Emerald may decline to accept deliveries of cannabis product from PSF. If product is declined, PSF may sell such product to third parties. In the event of such sale, and only in certain circumstances, Emerald may be required to pay to PSF an amount equal to the difference between the purchase price applicable to Emerald (which is subject to adjustment based on sales by PSF to third parties in accordance with the Supply Agreement) and the price actually paid by such third parties. Between June 21, 2019 and September 29, 2019, Emerald declined to accept certain deliveries of product; this product was subsequently sold by PSF to third parties."
"PSF has claimed that Emerald is liable to PSF for an aggregate amount of approximately $7.2 million under the terms of the Supply Agreement. Emerald disputes this claim as it believes that the basis for calculation by PSF of the purchase price is incorrect. Emerald is reviewing information very recently provided by PSF with respect to PSF’s wholesale sales," they conclude.
For more information:
Emerald Health Therapeutics
emeraldhealth.ca
Village Farms 
villagefarms.com