Harvest Health & Recreation (HRVSF) recently reported healthy second-quarter sales of $55.7 million for the period ending in June. The company also gave guidance for 2020 with a range of revenue between $215 million and $220 million. The revised target includes completed divestitures, and CFO Deborah Keeley said on the company's earnings call that they did not anticipate any additional divestitures.
While it seems Harvest Health has managed to navigate itself through numerous changes and deliver solid revenue, litigation issues are piling up. The company outlined several legal problems spanning the country from Washington state to New York. Investors will have to decide if these cases are just the normal course of business for a cannabis company or whether this many legal problems are a red flag. There is an additional situation in Florida that wasn't mentioned, but the case documents have been reviewed.
Washington State
In March, Harvest Health said it was buying a company called Interurban Capital Group, Inc. or ICG in a deal valued at $85 million. ICG would have added to Harvest's existing retail footprint with three open retail locations and seven potential retail licenses in California, five open retail locations in Washington state and two open retail locations in Iowa. The California locations were dispensaries called Have-A-Heart and trouble began almost immediately. The employees complained about layoffs to Marijuana Business Daily, and in April it was learned that Harvest was suing ICG. The company has since sold those properties, but the litigation remains.
It seems ICG and its Washington partners are also fighting amongst themselves. Harvest Health wrote in its SEC filing that on May 28, 2020, ICG filed a complaint in the King County Superior Court against the Respondents and other members of the Washington Retailers and their wives alleging a breach of the Washington Entities Options collectively, by the "Washington Entities Sellers", who sold the properties to Harvest Health. The case alleges a series of charges, including breach of contract and, engaging in unfair or deceptive acts or practices. The court heard oral arguments on the motion and they are now awaiting a ruling.
Arizona
In 2019, Harvest Health announced it was buying six licenses in Arizona. Harvest's agreement was with Devine Hunter, Inc., formerly the state's second-largest license holder, for an undisclosed amount of cash and stock. Harvest is suing for breach of contract and breach of the implied covenant of good faith and fair dealing claims.
An even bigger problem surfaced with the acquisition with another Arizona entity call Falcon International. That deal was originally valued at $155 million but was called off in January. Falcon complained about the valuation of Harvest Health's stock, which had declined. Harvest accused Falcon of misrepresenting its financial condition and illegal operations. It wanted the return of $47.8 million, including $23.3 million loaned at 4% interest and $24.5 million loaned at 8% interest. Harvest also alleged that Falcon neglected to send financial information for the deal. The competing lawsuits resulted in the parties going to arbitration, which Harvest has said is in its early stages.
Separately, MJBiz reported that Harvest Health employees in the state was also suing. The article states that the employees claim in their lawsuits they were forced to quit because of circumstances created by Harvest that would have required them to break the law to maintain their employment. Both are requesting jury trials and punitive damages. Harvest denied any wrongdoing, a company spokesman wrote in an email to Marijuana Business Daily.
Pennsylvania
Harvest Health acquired a Pennsylvania company called AGRiMED, but then shortly afterwards the state decided to not renew the license. The state said that AGRiMed had several violations with regards to state cannabis laws. Harvest said it's appealing the state's license renewal denial but that it could result in losing the license. Harvest said this wouldn't have a material effect on the company's operations. Harvest said that whatever AGRiMED did in violation was before the company acquired them.
Iowa
The ICG deal in Washington included two licenses in Iowa. The Iowa group called Rainbow HAH Council Bluffs is complaining that the rent wasn't paid. A photo on the website The Deep Dive showed back rent of $386,000 was outstanding. Harvest Health said that "through a recently acquired subsidiary, it provided support services to Have a Heart Iowa. Harvest's subsidiary planned to terminate its support services agreement with Have a Heart Iowa following its decision to close the dispensaries." At the time it was said that it wasn't economically feasible to operate dispensaries in the state. Harvest said the case lacks merit.
Florida
Then there's another rent agreement gone bad in Florida. In 2018, Harvest Health agreed to purchase San Felasco Nurseries. A third party called We Would Grow leased land to San Felasco. They sued San Felasco for $21 million for alleged breaches of the lease. This June the two parties dismissed the claims and considered the litigation resolved. Still, a separate $5 million was held back by Harvest for one year on indemnification claims. According to court filings, Harvest has asked to put the money in escrow to go to whomever won the case.
Clearly, the cannabis industry is rife with quickie marriages and messy divorces. In its zeal to expand, Harvest Health may have been too quick to enter various deals and once the dust settled either regretted the decision or tried to make the best of a situation. The solid cash flow helps investors who may be worried about these lawsuits.
When asked on the earnings conference call about divesting more assets, CEO Steve White said, "What we ask ourselves internally is, when we test our conviction about a market, we ask ourselves whether we would want to continue to invest in it and if we have the ability to. If the answer is we don't have the ability to or that we can't, then seeing the benefits of leverage, we probably would prefer to divest that asset, reinvest the cash and another one where we do have operating leverage."
White said Harvest is not aggressively pursuing any divestitures at this time.
