Aphria (NYSE:APHA) shareholders continued to be disappointed as the APHA stock price drops. Despite this disappointment, no one is talking abut one piece of potentially bearish news — and that should concern investors.
Aleafia Health (OTCMKTS:ALEAF) is a vertically integrated cannabis health and wellness company with a large presence in Canada. It produces cannabis-infused oils and capsules and it operates 25 medical clinics and education centers in Canada.
So what is this bearish news? In September of last year, Aphria and Emblem Cannabis, a wholly owned subsidiary of Aleafia, came to an agreement that Aphria was to supply up to 175,000 kilograms of cannabis to Emblem. Had all gone according to plan, the five-year agreement should have started in May 2019.
On Tuesday Aleafia said that it was terminating this agreement. This clearly was not an amicable breakup. It its statement, Aleafia attributed its decision to “Aphria’s failure to meet its supply obligations under the supply agreement.”
A Contentious Relationship
When a company makes a statement like this without trying to put any spin on it, it is usually a sign of a contentious relationship. For example, Aleafia could have used more diplomatic language and said something along the lines of “after careful consideration both companies have mutually decided that it was in their best interest to end the agreement.”
Aleafia’s statement clearly puts a negative light on APHA. Aleafia also assured shareholders that this termination of the agreement would not have any material effect on its operations.
What should concern Aphria’s shareholders, in my opinion, is its response to the announcement. It did not offer any explanation or try to fight back in any way. In response the company said “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.”
So … what happened? Why couldn’t Aphria keep up its side of the agreement? Was it due to logistics or operational issues? Was it due to the fact that Aphria isn’t growing enough to meet the demand?
A Closer Look at Aphria Stock
The ambiguity and lack of explanation in this statement would concern me if I was a shareholder. Aphria’s most recent investor presentation stated that the company’s annual production capacity of its combined facilities is 255,000 kilograms. If the agreement with Aleafia was for up to 175,000 kilograms over five years, that could be up to 35,000 kilograms a year — which is more than 10% of the total capacity.
Will Aphria have similar problems supplying other companies? It next reports earnings on Oct. 15. This will probably be a topic of discussion on the earnings call. If there isn’t more clarity on why Aleafia terminated the agreement, it could be a very bearish signal for APHA.
APHA stock is currently testing — and possible breaking support — around the $5 level. There was support at this level in August and early October.
At the time of this writing Mark Putrino did not have any holdings in the aforementioned securities.
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