Toronto marijuana company Aleafia Health intends to cancel a supply agreement with Aphria, citing a “consistent failure” to meet its obligations to provide cannabis.
The industry has grappled with supply issues since legalization, but until now, few companies have taken action over contractual shortfalls. The dispute between the Ontario-based companies could therefore be a sign of things to come.
Last year, Aphria agreed to provide Emblem (later purchased by Aleafia) up to 175,000 kilograms equivalent (385,800 pounds) of cannabis products over five years.
The first 25,000 kilograms was supposed to be shipped between May 1, 2019, and April 30, 2020.
However, in an Aug. 14 earnings call with analysts, Aleafia CEO Geoffrey Benic said there had been “some issues to date with us not receiving shipments required” from Aphria.
“Yesterday, Aleafia Health notified Aphria that it is terminating the cannabis supply agreement between the two parties after a consistent failure by Aphria to meet its obligations,” Aleafia Health spokesperson Nicholas Bergamini told Marijuana Business Daily.
The parties are contractually obligated to negotiate for 30 days.
As part of the supply agreement, Aphria received a nonrefundable deposit of 22.8 million Canadian dollars ($17 million), comprised of CA$12.8 million in cash and the rest in shares.
Bergamini said the termination does not preclude Aleafia from seeking the return of its deposit or damages relating to Aphria’s failure to perform.
Aphria said in a statement it “had every intention of fulfilling its obligations” but added that the termination of the agreement “frees up significant supply, allowing the company to service its brands.”
“If Aleafia initiates a formal claim for damages, the company intends to vigorously defend itself.”
‘Going to be more’
Matt Maurer of Torkin Manes cannabis law group in Toronto expects to see more companies enforce contracts in the coming months.
“I think we’re going to see more of this, just because it is not uncommon in this industry to see companies not do what they say they were going to do,” he said.
Federally licensed growers of cannabis struggled to scale up their large production facilities in the lead-up to legalization, resulting in significant shortages of high-quality, in-demand cannabis for much of 2019.
In the early months of legalization, for example, New Brunswick’s cannabis wholesaler received only 11% the 352 cannabis products that licensed cultivators agreed to supply on a regular basis.
Greg McLeish of Mackie Research previously acknowledged that licensed producers were seeing lower revenue.
“A lot of them thought they’d have more production online,” he said. “A lot of them didn’t factor in that maybe cannabis is harder to grow on an industrial scale, and we’ve seen several of the larger companies have massive crop failures.”
For some companies, that has meant breaching supply contracts.
“People aren’t doing what they said they’d do all over the place,” Maurer said. “It was only a matter of time before people stopped accepting it and started doing something about it.”
Matt Lamers can be reached at [email protected]