Harvest Health Flies Free from Falcon: Looking Beyond the Press Release

Previously announced on Valentine's Day 2019, Harvest Health & Recreation’s acquisition of Falcon International - a California cannabis company involved in cultivation, manufacturing, wholesale distribution and brand development - has ended in heartbreak nearly a full year after its pronouncement.

Well, heartbreak and litigation.

Litigating the Lark

Among the allegations outlined in the lawsuit that justifies the proposed annulment, Harvest claims that Falcon had failed to disclose pertinent financial information, and that Falcon had misrepresented that they did not have ‘undisclosed liabilities’. Additionally, the lawsuit identifies that Harvest had become aware of an emerging whistle-blower report that accused Falcon of illegally delivering cannabis products across state lines.

The lawsuit, filed in Arizona District’s U.S. Federal Court this past Monday, seeks to compel arbitration between the two companies, along with Harvest seeking both restitution and the appointment of Falcon’s business and assets. Harvest is also attempting to re-coup the $50 million in cash and in-kind advances that the company made to Falcon.

While the deal was originally determined to cost “a non-material undisclosed amount of stock”, terms of the agreement were later amended to specify the cost of the transaction would be a total $240million, payable in Harvest stock.

Trouble in the Coop

The relationship with Falcon and Harvest appeared to expedite its disintegration in October after Harvest’s letter to Falcon on October 16, requesting information regarding the company's finances, went unrequited.

Just two weeks later, Falcon negotiated a Standstill Agreement; and, as a result of this Standstill, Harvest was prevented from declaring Falcon to be in breach or default of the contract, while Falcon was not obligated to comply with Harvest’s request to review their financial information.

According to the lawsuit, as the initial Standstill period was drawing close to its end, Harvest agreed to extend the agreement until January 2020.

However, representatives from both companies held meetings together at a business conference in late 2019 and Harvest, in the lawsuit, characterized these meetings as “non-productive” while also detailing that 2 defendants named in the suit, Edlin Kim and James Kunevicius, stated candidly that they did not want to see the deal to its completion.

The lawsuit delves further into the alleged details:

“Edlin Kim … appearing at the meeting with visibly large amounts of cash in his front pocket and back pocket and in a bag, and wearing what appeared to be many tens of thousands of dollars in men’s jewelry made of gold, and with both Falcon representatives (Edlin Kim and James Kunevicius) expressing no interest in doing any work to move the planned transaction with Harvest forward and, instead, stating openly that Falcon would not close the Merger Agreement, as amended, due exclusively to the decline in Harvest’s stock price”

Harvest, in the Jan. 7 press release disclosing the litigation, went on to identify that their previously publicized 2020 pro-forma guidance, $700-1000 million in revenue alongside a 20-30% adjusted EBITDA margin, would also be affected by the cancellation of this acquisition. While not disclosing specific numbers, the company identified that, without Falcon, their “profitability would improve without the revenue contribution from Falcon.”

Fluttering Away from the Tiding of Magpies

A picture from inside the Cheyenne facility

Perhaps underscoring the foreboding dissolution of the Falcon acquisition, Harvest has had a busy last couple of weeks as they appear to be doubling down in Nevada, while also expanding their portfolio of dispensaries in both California and elsewhere.

Announced on January 2nd, Harvest announced it would be further strengthening their pending presence in Nevada with a newly acquired growhouse. Harvest agreed to terms with MJardin Group to procure their 32,000 sq.ft. greenhouse in Cheyenne, Nevada for a purchase price of $35 million.

Harvest, by way of their ongoing acquisition of Verano Holdings, will have exposure in Nevada to the tune of 11 storefronts. Verano, doing business as Lone Mountain Partners in the application process, were awarded these retail licenses in December 2018. Operating under the brand name Zen Leaf, Verano presently has just one operational dispensary in Las Vegas. Harvest recently hired Verano’s former Chief Operating Officer, Ron Goodson, on Jan 6.

Have A Heart's Seattle storefront

And, on Jan. 6, another point of pivot for Harvest came by way of its mandated announcement of acquiring Interurban Group, owner and operator of Have a Heart CC. Stating that discussions between the two had reached a stage that required disclosure, Harvest's plans to acquire Have a Heart would enable them to immediately operate three dispensaries in California, six storefronts in Washington, and two dispensaries in Iowa, while also granting them the licenses to build-out an additional seven California storefronts. The proposed deal would cost $87.5 million in Harvest stock, along with the assumption of debt convertible into 205,594 multiple voting shares of the company.

Flocking Forward

A look at the before and after footprint of Harvest Health & Recreation, assuming the closing of 'HAH' and Verano

Stifel analyst Robert Fagan, in a note to client this past Wednesday, anticipates Harvest Health will generate a negative EBITDA of $48.2million on $120million in revenue for fiscal 2019. Fagan believes the company will improve these numbers to an EBITDA positive $69.8million, alongside $469million in revenue, in 2020.

Harvest Health & Recreation's (CSE: HARV, OTC: HRVSF) share price fell roughly 10% on the day of the lawsuit's announcement, and ended the week down 11%.

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