Aphria Inc. (TSX | NASDAQ: APHA) and Aleafia Health Inc. (TSX: AH) reached a settlement agreement Thursday to resolve their dispute over a cancelled supply deal.
Under the terms of the 2018 deal, Aphria was to supply Emblem Corp. (TSX-V: EMC) with 175,000 kilograms of dried flower and crude cannabis oil over a five-year period.
But last year, Aleafia Health acquired Emblem and cancelled the supply deal.
On Thursday, Aphria said in a statement Emblem would receive $29 million, made up of a $15.5 million cash payment and the issuance of $10 million worth of common Aphria shares. The shares are freely tradeable and transferable in Canada and waiver of claimed receivables.
The parties also agreed to a mutual release of all existing and potential claims and to dismiss previous arbitration proceedings.
Aphria CEO Irwin Simon said he was pleased to reach an amicable solution.
“Today’s settlement announcement allows all of us to avoid unnecessary distraction and the potential expense of prolonged litigation, and importantly, to continue to focus on the future,” he said.
— aphria inc. (@aphriainc) June 25, 2020
The deal was first reported September 2018 when Aphria signed a wholesale supply agreement with Emblem for 175,000 kilograms of high-quality cannabis, supplied over five years time. Aphria was given a non-refundable deposit of $22.8 million for the deal, made up of $12.8 million in cash and 7 million common Emblem shares.
“Aphria’s total annualized production capabilities are about to reach 255,000 kg in early 2019, which means we are not only well positioned to meet all of our supply commitments across Canada and anticipated international demand, but also have the capacity to support the projected demand through our partners,” Gregg Battersby, Aphria VP of Commercial Strategy, said in a September 2018 statement.
Two months later, Aleafia Health acquired Emblem for $173 million in an all-stock deal. Aleafia Health said the transaction created a “new Canadian medical cannabis leader” that could produce and annual 138,000 kilograms of weed, with its committed supply agreements.
But in October 2019, Aleafia Health said Aphria failed to meet its supply obligations under the agreement and had, by default, terminated the supply deal.
“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 Health said in an October 2019 statement.
Aphria responded to the news by issuing a statement saying they were “disappointed,” and that “the company had every intention of fulfilling its obligations under the agreement.”
The termination of the agreement freed up a significant supply of cannabis Aphria could then sell under its own high-demand brands, the company added. Aphria also said it planned to vigorously defend itself if Aleafia sued for damages.
However, today’s settlement ends any potential claims and litigation between the three companies related to the the supply deal. Aphria said.
On the news of the settlement, Aphria’s stock remained stable around $5.76 per share and Aleafia Health’s stock rose 8 per cent to $0.54 per share.
Top image of Aleafia Health’s Port Perry outdoor grow site in Ontario. Press photo