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Heated battle for Delta mega cannabis grower

A huge Delta greenhouse operation that’s made the switch to cannabis is now involved in a nasty battle for control with many millions of dollars on the line.
village farms
Village Farms says that its joint venture with Emerald Health, Pure Sunfarms, has 'reserved the right to take such actions as it considers necessary and appropriate to recover its losses from Emerald for non-payment of amounts owing by Emerald under the supply agreement.'

A huge Delta greenhouse operation that’s made the switch to cannabis is now involved in a nasty battle for control with many millions of dollars on the line.

Before the legalization of cannabis last year, Village Farms International in East Ladner partnered Emerald Health Therapeutics, Inc. to form a new venture called Pure Sunfarms.

The cannabis company has begun shipping branded, packaged dried cannabis products to the B.C. Liquor Distribution Branch, which acts as the provincial wholesaler of non-medical cannabis, supplying licensed private retailers and the government-run online store and stand-alone B.C. Cannabis Stores.

The plan is to eventually have all 2.2 million square feet of production space at the facility converted to cannabis.

 

Village Farms on Tuesday announced that, following an equity payment default by Emerald, it has notified Pure Sunfarms that it has exercised its rights under a shareholders agreement to increase Village Farms' ownership position in Pure Sunfarms and advanced an equity payment of $5.9 million.

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Emerald was obligated to pay that sum to Pure Sunfarms on Nov. 1, 2019, and, according to Village Farms, following Emerald's failure to make the 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, Village Farms claims.

“Assuming the VF Additional Equity Contribution is accepted by Pure Sunfarms, Village Farms will receive an increased equity interest in Pure Sunfarms effective as of November 19, 2019…..The calculation of the precise increased equity interest requires a determination of the fair market value of Pure Sunfarms pursuant to an appraisal process. Accordingly, Village Farms' precise increased equity interest in Pure Sunfarms is not ascertainable at this time. However, the aggregate effect of the VF Additional Equity Contribution and the potential cancellation of Emerald's escrowed shares of Pure Sunfarms…is not expected to have an impact on the voting control of Pure Sunfarms (which would occur if Emerald were to hold less than 35 per cent of the equity of Pure Sunfarms).”

 

Village Farms also states, “In light of Emerald's recent pattern of initiating disputes relating to Pure Sunfarms, no assurance can be given that Emerald will not similarly initiate a dispute in respect of the VF Additional Equity Contribution.”

Village Farms adds, “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.”

The greenhouse operator also notes that Emerald has a contractual obligation to purchase 40 per cent 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.

pure sunfarms

 

“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 September 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.”

 

In response, Emerald Health issued its own statement disputing the claims, expressing surprise and disappointment about the “inaccurate allegations” made by Village Farms.

Emerald notes that yesterday evening it received notice from Village Farms stating that Village Farms had advanced $5.94 million to Pure Sunfarms for additional equity, but Village Farms has no such right. 

Despite Village Farms’ claims, Emerald it continues to hold a full 50 ownership interest in Pure Sunfarms.

“We were shocked to receive this notice,” said Riaz Bandali, president and CEO of Emerald, in a news release.

“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.”

 

Under the shareholders' agreement, Village Farms only has the right to make an equity contribution and increase its ownership stake if the other shareholder has defaulted under a contribution notice, Emerald states.

Emerald also states it has acted in good faith with respect to its Pure Sunfarms joint venture, to date contributing over $37.4 million in equity investment in the greenhouse operations, providing $13 million in an interest bearing loan and purchasing over $20.5 million of cannabis as per the terms of its supply agreement with Pure Sunfarms.

delta cannabis pure sunfarms

 

As far as the escrowed shares. Emerald states it agreed to advance an aggregate of $25 million to Pure Sunfarms.

Additionally, certain shares of Pure Sunfarms issued to Emerald were placed in escrow with an escrow agent and were to be released to Emerald upon payment by Emerald of amounts payable under the option agreement.

Emerald has advanced a total of $17.4 million to Pure Sunfarms under the agreement and it was required to advance a further $5.94 million to Pure Sunfarms on Nov. 1, 2019, however, Emerald notified Pure Sunfarms that it has decided to set-off the $5.94 million payment owed by Emerald against a portion of Pure Sunfarms debt under Emerald’s $13 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 million principal amount shareholder loan, plus interest. Emerald’s demand for repayment of its shareholder loan was delivered to PSF this morning.”

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As far as the supply agreement, Emerald explained it may decline to accept deliveries of cannabis product from Pure Sunfarms which in turn may sell the product to a third party.

In the event of such sale, and only in certain circumstances, Emerald may be required to pay to Pure Sunfarms an amount equal to the difference between the purchase price applicable to Emerald, which is subject to adjustment based on sales by Pure Sunfarms to third parties in accordance with the supply agreement and the price actually paid by 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,” Emerald states.