Aphria stock is down 2% after Aleafia Health (TSX:ALEF) (OTCQX:ALEAF) announced the end of its supply deal with Aphria Inc (TSX:APHA) (NYSE:APHA).
Aphria Stock Trading Down After Failure to Meet Obligations
Toronto-based cannabis company Aleafia Health announced on Tuesday that it was terminating its supply deal with Aphria Inc, citing failure to meet its obligations under the agreement. The supply deal was initially penned in September 2018 and was supposed to see Aphria supply Aleafia's subsidiary, Emblem Corp, with 175,000 kilograms of high quality dried cannabis flower and crude cannabis oil at preferred wholesale pricing over a five-year period beginning in May. Aphria stock is trading down at $7 during Tuesday's trading.
“Following Aphria’s failure to meet its supply obligations under the supply agreement, Emblem has exercised its contractual right to terminate the supply agreement in accordance with its terms,” Aleafia said in a statement. The two parties are now contractually obliged to negotiate for 30 days following the submission of the notice of termination. If no settlement agreement can be reached, Aleafia Health can claim for damage, while Aphria interim CEO Irwin Simon says the company “intends to vigorously defend itself.”
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Positives for Aphria Stock
One potential boost for Aphria stock in this situation is the freeing up of a significant portion of its inventory. "[...] 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," said Simon. Supply issues have been a problem for cannabis firms since Canadian legalization came into effect a year ago, with Auxly Cannabis Group (TSXV:XLY) (OTCQX:CBWTF) Chairman Chuck Rifici arguing that these issues will continue to dog the industry for the next 18 months.
Aphria stock has been outperforming its peers in recent weeks, with some analysts describing it as the most well-behaved stock in the cannabis space. While the company possesses a pretty healthy balance sheet, with $422 million USD in cash and current assets five times greater than liabilities, the stock's reputation will obviously take a hit from today's news. However, if Aphria Inc can meet its own supply needs, and escape from the deal with minimal damages, 2020 could be a good year for this pot stock.
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