ACB.T, Aurora cannabis, VFF.C, EMH.C, Emerald Health, Pure Sunfarms, OCS sales, Rec cannabis

Village Farms (VFF.C) says Emerald Health (EMH.C) liable for $7 million bill, Emerald vehemently denies

Emerald Health (EMH.C) and Village Farms (VFF.C) are quarreling over whose turn it is to settle up at the bar, and investors on both sides are nervously waiting to see who must pay the alimony.

A total of $7 million hangs in the balance, with each side saying the other is at fault.

In July 2018, both companies announced their commitment to the cannabis effort through the establishment of Pure Sunfarms, an evenly-split JV which aims to bring premium B.C. bud to Lower Canada and beyond.

Pure Sunfarms is in the process of converting a second 1.1 million square foot greenhouse for cannabis production (anticipated to come online in 2020), which is expected to double annual output at full production to 150,000 kilograms. The company also holds an option on an additional greenhouse facility, currently owned and operated by Village Farms, which could further increase total production area by approximately 2.6 million square feet.

The venture’ selling point is, in part, its predecessor’s experience in agricultural cultivation: Village Farms has been growing cucumbers and tomatoes since 1989, and has translated decades of expertise into a space where most operators have been learning on the job.

All-in production costs for Pure Sunfarms “was $0.65 per gram based on increased production volume and lower seasonal costs,” according to a recent press release.

For comparison, production costs for Aurora Cannabis (ACB.T) were $1.14 in the quarter ending June 30, 2019.

A report from GMP Securities found media reports “suggested that PSF’s sell-through volumes in the OCS online store have reached ~50kg in the first two weeks of Oct., positioning the JV with a ~20% market share on a volume basis.”

ACB.T, Aurora cannabis, VFF.C, EMH.C, Emerald Health, Pure Sunfarms, OCS sales, Rec cannabis

That was within its first month of listing on the illustrious Ontario Cannabis Store. Another first was the venture ending the fourth quarter of 2018 EBITDA positive. I stretch my memory to its limits to recall a competitor which can say as much.

But, it wouldn’t be long before word of trouble in paradise reached the street.

According to Village Farms, Emerald health did not exercise its right during the third quarter of 2019 to purchase up to 40% of the joint venture’s cannabis output.

Combined with declining wholesale market prices during the third quarter–when compared to the previous quarter– the joint venture decided to sell “that excess production in the spot market at prices lower than the predetermined selling price to Emerald under the supply agreement.”

Village Farms says Emerald Health is required, under the terms of the joint venture, to reimburse Pure Sunfarms for the $7 million lost due to selling their product on the market at reduced prices.

As at the date hereof, the joint venture has advised the company that: (i) Emerald currently owes the joint venture approximately $7-million of price deficiency obligations; and (ii) Emerald has advised the joint venture that it does not agree with the joint venture’s position and that it believes it is not responsible for any price deficiency obligations under the supply agreement.

–Village Farms

Emerald Health, however, says it owes its progeny no such thing: The company announced “that it does not agree that Emerald has any liability under the current Supply Agreement between Emerald and the Joint Venture.”

The press release meant to refute Village Farms’ assertions says that refusing to buy up to 40% of Pure Sunfarms’ cannabis would make Emerald Health liable to pay the difference only “under certain circumstances.” The company clearly does not believe this to be one such circumstance.

Oh dear. No matter how the terms evolve, questions over paternal responsibility never seem to.

In my day, we used the oscillophore to determine one’s responsibility, or lack thereof, to any strumpet claiming I owed her a shilling each week for talcum powder or some such folly.

ACB.T, Aurora cannabis, VFF.C, EMH.C, Emerald Health, Pure Sunfarms, OCS sales, Rec cannabis

The machine was quite wonderful: Its creator hypothesized that it could detect vibrations in blood samples drawn from a potential father, and match these readings with the child’s to establish a biological relationship.

If Village Farms and Emerald Health should need a mediator, and for a small portion of the $7 million in question, I would be more than happy to lend them my oscillophore. I should have it around here somewhere…


–Mr. Millionaire

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