Aphria Fails To Meet Supply Obligations, Sees Aleafia Cancel 175,000 Kilogram Agreement

Aleafia Health (TSX: ALEF) announced this morning that Aphria Inc (TSX: APHA) (NYSE: APHA) had failed to meet supply obligations and thus the firm was terminating the agreement between the two parties. The supply agreement had originally been entered between Emblem Corp, now an Aleafia subsidiary, and Aphria on September 11, 2018.

The supply agreement between Emblem and Aphria was for a five year period, with commencement of supply beginning on May 1, 2019. In total, Aphria was to supply the Aleafia subsidiary with 175,000 kilograms of dried cannabis over a 5 year period. The first year was to consist of 25,000 kilograms, and gradually increase to 45,000 kilograms per annum over the five year term.

Aleafia indicated that Aphria had failed to meet its supply obligations, and as a result the agreement was terminated as per Emblems rights within the arrangement.

Aphria issued a follow up release after the Aleafia announcement, stating, “We are disappointed that Aleafia has chosen to terminate its Agreement with Aphria Inc. The Company had every intention of fulfilling its obligations under the Agreement. As a large shareholder of Aleafia, Aphria made good faith efforts to ensure continuation of the Agreement understanding it was in the best interest of all parties involved. However, the termination of this legacy Agreement frees up significant supply allowing the Company to service its brands that are in high-demand across the country.

Aphria also indicated that the two firms are subject to a 30-day negotiation period following the notice of termination. Should an agreement not be met, Aleafia is then able to file for damages if it so wishes.

Despite the size of the supply arrangement, Aphria indicated that it is not a material part of the firms business and operations. This statement is questionable however, as the firm currently indicates that it has 115,000 kilograms in annualized production – indicating that a 25,000 kilogram per year agreement would amount to over 21% of the total cannabis capacity the firm currently maintains.

Furthermore, Aphria sold 13,397 kilograms of cannabis during fiscal 2019 – approximately half of what the Emblem agreement consists of, indicating that the loss of the agreement is a material impact to the operations of Aphria. Perhaps the most interesting tidbit about the whole situation, is that Aphria failed to meet its supply obligations, yet holds 6,309 kilograms of product in inventory as of May 31, the latest reporting period for the firm. The resulting data suggests that the quality of the product may not have met contractual obligations, and thus the product was left to sit in inventory.

Aleafia Health closed yesterdays session at $0.85 on the Toronto Stock Exchange.

Information for this briefing was found via Sedar, Aphria Inc and Aleafia Health. The author has no affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.