On January 7th, Harvest Health & Recreation (CSE: HARV) (OTC: HRVSF) revealed that it has filed a lawsuit against Falcon International seeking to terminate its merger that was announced in early 2019 and the return of money paid to the company thus far. The lawsuit, which was filed in the U.S. Federal Court in Arizona, suggests that Falcon’s principals stalled due to the falling share price of Harvest. Additionally, Harvest alleges that Falcon International engaged in illegal activities.

The company had announced the deal without sharing terms in February 2019. Subsequent filings indicate that Harvest was going to pay stock valued at up to $240 million. It is described in the MD&A filed in November:

The merger consideration is contemplated to be $155 million plus an earnout payment of $85 million if certain revenue thresholds are met, payable in Multiple Voting Shares at the time of closing. The number of Subordinate Voting Shares to be paid is determined by dividing the merger consideration, converted to Canadian currency using the Bank of Canada daily average exchange rate published on the day prior to closing, by 100 times the lower of (a) CAD $10.98; or (b) a price equal to the greater of (i) the closing price of the Company’s Subordinate Voting Shares on the CSE on the business day prior to the closing date; or (ii) CAD $9.333.

According to the lawsuit, the terms were changed in June when Falcon complained about the falling share price of Harvest’s stock. The original terms weren’t disclosed in the lawsuit.

The company is seeking the return of $47.8 million as well, which includes $23.3 million loaned at 4% interest for a secured promissory note and $24.5 million loaned at 8% (unsecured), and equipment, as well as $4.1 million paid to principals James Kunevicius and Edlin Kim ahead of closing. It additionally alleges that the two principals who received the “control person transaction” payment failed to disclose it to their partners.

The Harvest lawsuit accuses Falcon of misrepresentation of its financial condition and illegal operations that included interstate transportation:

Specifically, evidence exists that Falcon was knowingly engaged in a pattern of ongoing violations of law and regulations governing its conduct as a marijuana/cannabis business, on information and belief, including (a) providing marijuana/cannabis in violation of California Bureau of Cannabis Control (“CBCC”) regulations and (b) interstate transportation of marijuana/cannabis before the Merger Agreement was executed, and (c) that it engaged in ongoing CBCC regulation violations after the Merger Agreement was executed.

According to the lawsuit, Harvest attempted to close the deal following the expiration of HSR waiting period. It alleges that Falcon failed to send financial information from October into January, during which the two companies had entered into “standstill agreements” that expired on January 5th, the day before Harvest filed the lawsuit.

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Exclusive article by Alan Brochstein, CFA Facebook | LinkedIn | Email Based in Houston, Alan leverages his experience as founder of online communities 420 Investor , the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures , he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha , where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter