Multi-state operator Harvest Health & Recreation announced it will no longer move forward with its planned acquisition of US cannabis company CannaPharmacy. The deal would have secured the MSO licenses in four states.
A proposed acquisition from a multi-state operator (MSO), which was held pending due to a federal review, has now been canceled.
On Wednesday (November 20), Harvest Health & Recreation (CSE:HARV,OTCQX:HRVSF) confirmed it would no longer acquire the entire CannaPharmacy operation; instead, it has elected to only bring aboard a subsidiary of its intended target for US$26 million.
The subsidiary, called Franklin Labs, operates an all-around cannabis facility in Reading, Pennsylvania. However, when Harvest originally announced the acquisition, it envisioned obtaining cannabis licenses in Pennsylvania, Delaware, New Jersey, and Maryland.
“This revised agreement and attractive funding sources will help us toward achieving our revenue and profitability goals,” Harvest Executive Chairman Jason Vedadi said in a statement.
Arizona-based Harvest told shareholders the total acquisition did not fit with the current operational needs of the company. The original acquisition deal for CannaPharmacy was unveiled back in April.
At the time, Vedadi called the deal a critical addition to the rest of the acquisitions Harvest was in the process of closing.
The deal was put under federal scrutiny as part of a Request for Additional Information and Documentary Materials, also known as a second request, from the Department of Justice (DOJ).
This represented the third deal for which Harvest faced a federal review. In a previous press release issued in September, the MSO had confirmed to have filed all the substantial compliance needed with the regulators to complete its CannaPharmacy transaction.
White said in a statement the company was confident it would complete all its acquisitions held under inspection by the federal second request.
Harvest posts revenue uptick for Q3 2019
Also on Wednesday, the MSO reported a 25 percent increase in its total revenue from its previous quarter for a figure of US$33.2 million.
In its Q3 earnings report, Harvest attributed the growth in revenue to some of its most recently completed retail location acquisitions and the development of its retail and wholesale businesses.
However, the company still posted a net loss of US$39.1 million for the quarter, which Harvest said was due to the spending for its acquisition and expansion plans.
At the end of the quarter, on September 30, the company held 26 retail stores in the US.
Harvest clears federal inspection for other proposed deals
So far this year, Harvest has continued its merger and acquisition (M&A) activity path by pursuing deals to expand its operational presence in the US.
In November, the company passed a federal review in place for its key acquisition plan of Verano Holdings under the Hart-Scott-Rodino Act.
After passing the second request of information, which was originally issued in July by the DOJ, the two companies entered a 30 day waiting period before completing the deal.
“Our commitment to bringing these two great companies together has never been in doubt despite any delays,” said Harvest CEO Steve White said of the deal with Verano.
Harvest projected the two will be able to close the deal after December 4.
Similarly, the company received a second request for its proposed acquisition of Falcon International, a California-based cannabis operator.
These federal reviews have started spreading within the cannabis space in the US, with several MSOs facing delays to critical acquisitions.
While the review has caused speculation towards the security of these deals, in an investor call Charlie Bachtell, CEO of Cresco Labs (CSE:CL,OTCQX:CRLBF), said these inspections represent a clear acknowledgment from the federal authorities of the cannabis industry.
Shares of Harvest jumped on Wednesday’s trading session following the announcement of the deal change and the release of its Q3 2019 earnings report.
As of 12:22 p.m. EST, Harvest was up 6.19 percent for a price of C$3.60 after opening at C$3.50 per share.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.