Arizona-based Harvest Health & Recreation (CSE: HARV, OTCQX: HRVSF) announced that it filed a lawsuit yesterday against California cannabis company Falcon International.

Harvest, a multi-state cannabis operator and vertically integrated cannabis company, is seeking the termination of the merger agreement made with Falcon.

Harvest saw the writing on the wall that California is going to be a tough place to make money.

They are being smart to try and use the legal system to back out of an expensive deal so they can re-enter the state at a later date for a discount.

Investors should love hearing that profitability will actually improve if this deal falls apart, even though revenue growth will be somewhat less for 2020.

The cannabis industry already has more than enough growth and far too little profits.


Merger Designed to Expand California Distribution Capabilities

Back in February, Harvest announced plans to acquire Falcon for the purpose of establishing a base for its manufacturing and distribution businesses in California.

Harvest had planned to purchase Falcon in an equity-only transaction and had initially foreseen that the deal would close in the first half of last year.

As part of the announcement, Harvest reiterated its commitment to cannabis sales in California despite challenging market conditions that make it difficult to turn a profit.

It said that if the transaction made with Falcon is not completed it will remove the financial contribution that was attributed to the Falcon merger from its 2020 guidance.

Even absent the revenues that would be derived from Falcon, however, Harvest anticipates that profitability will improve in fiscal 2020.


Falcon Brands, Production are Valuable Assets

Falcon International is a vertically integrated cannabis company located in California, the most competitive market in the country for product development.

It is considered a leader in cannabis research and development as well as brand development.

Its statewide distribution network is one of the largest in the state serving more than 80% of California cannabis dispensaries.

Aside from Falcon’s valuable distribution platform in the key California market, Harvest was also attracted to its 16 cannabis licenses related to cultivation, manufacturing, and distribution.

Moreover, Falcon’s brands are among the best-selling cannabis products in the state, including Cru Cannabis, Littles, and High Garden.

As an expert in cultivation, Falcon’s supply chain supports several indoor, greenhouse, and outdoor flower brands.

The company’s automated manufacturing facilities have the capacity to produce over one million packaged units monthly and plans are underway to triple this capacity.

Falcon also brought to the table an experienced management team with expertise in managing high-growth companies.


Harvest Still a Market Leader Even With Near-Term Falcon Headwind

Shares of Harvest are down almost 9% in midday trading in response to today’s headline.

Following the closing of its pending acquisitions, Harvest will have established a market-leading presence in the U.S. with over 200 facilities across 18 states and territories.

This will include roughly 130 Harvest House of Cannabis retail outlets targeting both medical patients and consumers.

Shares of Harvest are down almost 9% in midday trading in response to today’s headline.

Although Falcon is just one of several companies that Harvest is in the process of acquiring, the loss of the Falcon assets in the critical California market is likely to have a meaningful impact on 2020 financial results and leave the company in need of an alternative expansion strategy in the state.

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