Following an equity payment default by Emerald Health Therapeutics (OTCQB: EMHTF) under the Delta 2 option agreement involving Pure Sunfarms, Village Farms International (TSX: VFF) (NASDAQ: VFF) has informed Pure Sunfarms of exercising its rights to increase its ownership in Pure Sunfarms and advanced an equity payment to Pure Sunfarms of $5.94 million.

Emerald was obligated to pay $5.94 million to Pure Sunfarms on Nov.1, 2019. Following Emerald’s failure to make the equity payment, Pure Sunfarms issued a default notice to Emerald.

Assuming the equity contribution is accepted by Pure Sunfarms, Village Farms will receive an increased equity interest in the company effective as of Nov. 19, 2019. The calculation of the precise increased equity interest requires a determination of the fair market value of Pure Sunfarms under an appraisal process. Accordingly, Village Farms’ precise increased equity interest is not ascertainable at the time.

However, the aggregate effect of the 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% of the equity of Pure Sunfarms.

“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,” according to a statement issued by Village Farms.

Emerald’s Escrowed Shares Cancellation

In connection with entering into the Delta 2 option agreement, certain shares of Pure Sunfarms were placed in escrow as part of 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 $5.94 million 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 canceled 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.

Pure Sunfarms’ Supply Agreement with Emerald

Under the terms of Pure Sunfarms’ supply agreement, Emerald has an obligation to purchase 40% of the company’s 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. Last month, Emerald announced they do not agree that they have any liability with respect to these amounts.

Village Farms understands that Emerald is in the process of investigating its supply agreement liability to Pure Sunfarms. If Emerald does not agree to the liability, 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.

Village Farms clarifies that it is not a party to the supply agreement and any amounts owing thereunder are payable by Emerald to Pure Sunfarms.