When High Times closed on its deal to buy ten California cannabis dispensaries from Harvest Health at the end of June, chairman Adam Levin was made aware he wasn’t buying ownership control of most of them, according to dispensary stakeholders interviewed by Cannabis Law Report.
In fact the seller, Harvest Health, didn’t even have control of the equity ownership it bought in California dispensary licenses from Have A Heart founders on June 23 when both companies announced the closing of the transaction, according to an email reviewed by CLR that was written by Harvest assistant general council Laz Rothstein.
High Times have boasted in a number of 2020 press releases that the deal would give them a footprint in California and valued the deal as a $61.5 million transaction with a $1.5 million cash payout to Harvest.
In reality the cash to Harvest appears to have bought no more than an overpriced marketing campaign which attempts to show that High Times has capital to grow its business and encourage unsophisticated cannabis investors to sink more money into Levin’s attempt to make High Times a publicly traded penny stock.
The original merger agreement between Harvest and Have A Heart’s corporate llc, Interurban Capital Group, signed on March 10, 2020 shows the deal was contingent on Washington-based entrepreneur and Have A Heart founder Ryan Kunkel transferring his equity ownership in the licenses.
A copy of the private merger agreement was obtained by Cannabis Law Report. But at the time of the sale to High Times, Kunkel and Harvest were in a knock down legal battle that court documents show involves alleged fraud, breach of contracts, and unclean hands.
On June 26th, three days after the High Times deal closed, Laz Rothstein wrote to the man who worked behind the scenes to negotiate the Have a Heart sale. That man, a mega millionaire from Washington, was Have A Heart’s majority shareholder, Daniel Rainer, according to the merger agreement. An email titled “Ryan Kunkel refuses to cooperate with the merger agreement” was begging Reiner to step up and get Ryan to do what was needed to get the assets transfered.
“I have been informed that Ryan has refused to cooperate with Beau to assist in furthering the issuance of the regulatory licenses for the California Entities and ultimately approval of the transfer of those licenses to ICG. Section 5.06(f) of the Merger Agreement requires the Stockholder Representative to cause the California Entities to do this.”
According to Beau, Ryan refused to do anything unless he is directed by his counsel to take some action.
“Can you reach out to Ryan and his counsel and demand that Ryan take immediate steps to do this? Harvest does not have the contractual right to directly demand that Ryan take action as this is an obligation of Fertile Valley, LLC as the Stockholder Representative.” wrote Rothstein.
Fertile Valley is an llc Dan Reiner used to hold his private stock in Interurban Capital Group, according to documents obtained by CLR. The email was also addressed to Bill Kinzel a man who works with Reiner at his V.C. company Osprey Ventures.
When CLR asked Harvest’s Laz Rothstein if they actually owned the California assets sold to High Times; corporate assistant Christine Hersey wrote back an unsophisticated spin email that said….
“On June 23, 2020, Harvest announced the completion of the divestiture of equity and interests in eight planned and operational retail assets in California to Hightimes Holdings. Following the completion of that divestment, Harvest does not own any equity or interests in California assets that were previously owned by Interurban Capital Group.”
CLR informed Hersey that the publication had obtained a confidential email written by Rothstein that appears to paint a different picture. Harvest subsequently went radio silent and as of press time has still refused to answer any more of CLR’s questions on the matter.
In December, Harvest issued a press release that Dan Reiner would become a special advisor to their board and remains so this day. What Harvest left out of the press release is the fact that Reiner was also the majority shareholder to Interurban Capital Group and owned High Alpine Advisors which held a secured credit line of up to $25 million with ICG that funded the Have A Heart dispensaries expansion into California and Iowa.
Additionally, while Reiner was negotiating the sale of Have A Heart for an all stock transaction of over $2 a share; he was also securing a side deal to invest in Harvest at a lower price of $1.41. The private placement Reiner and his wealthy friends participated in raised $58 million for Harvest. On top of that Reiner choose to convert the $19.096 million ICG had drawn down from the credit facility to Harvest stock through a stock warrant transaction, according to deal documents and individuals involved in the transaction.
“Harvest buying ICG was really just a precursor with the intion of getting Reiner out of his Have A Heart investment so he could put millions into Harvest and get a boatload of publicly trading stock,”
One former ICG executive told CLR who based on a NDA clause and cannot speak publicly.
“This transaction underscores the inherent risks and complexities that still loom in cannabis investing. The perceived “smoke and mirrors” associated with this deal now exposes both Harvest and High Times to further regulatory scrutiny,” Matthew A. Karnes founder of Green Wave Advisors told CLR.
Harvest’s lack of transparency in the deal is confounded by the fact that while they have mentioned they are in litigation with Kunkel they won’t actually tell anyone what it is about because they say the case was moved to arbitration.
But, CLR have obtained at least five lawsuits filed in Washington State court that show Harvest, through its new subsidy Interurban Capital Group, doesn’t even have working management service agreements with the five dispensaries in Washington. Those service agreements were grossing up to $400k a month per dispensary.
Cannabis laws in Washington require you to be a resident of the state in order to own a dispensary and the dispensary owners named on the license are required to control pricing of the product and hiring of personnel. Kunkel’s name is on all the Washington dispensary licenses, according to the merger agreement. What Harvest was buying in the deal is two fold. A call option to buy the Washington dispensary license if they could get a Washington resident on their staff and the management of the store contract.
Management contracts are popular in the cannabis industry because in some states it means the management company llc isn’t taxed at the same high rate sales that (cannabis) flower is taxed at.
Harvest Retaliation against Dispensary owners
After Harvest closed its deal with Ryan Kunkel and Dan Reiner, it moved immediately to fire senior staff loyal to Kunkel. It also significantly increased the pricing of monthly management contracts. New staff were hired with bigger salaries and Harvest even started to change the price of products sold in the dispensaries.
These moves alarmed Kunkel and his fellow dispensary owners, because, according to court documents this meant the dispensaries were now violating Washington state law and Kunkel could lose his license and damage his goodwill with the state’s governing body that approves dispensary licenses. So, he cancelled the ICG management contract three weeks after the merger was signed claiming among other things that Harvest had breached the ICG deal.
Additionally, public records also show that Kunkel subsequently created a new llc. Since Harvest owned the Have A Heart name all five Washington dispensaries were changed to be called “The Cannabis Storey” and Have A Heart signage was removed.
This caused great consternation with the lawyers at Harvest, who were furious. They locked Kunkel and his team out of their point of sale system and then proceeded to discount all of the products by 50%, according to the content of the lawsuits. They also made it impossible for Kunkel to track sales in the store, sales that he has to report, by law, to the state of Washington thus forcing Kunkel to shut down his dispensaries for a few days. Kunkel eventually retained control over all the stores internal systems and runs them to this day.
Meanwhile Harvest keeps trying to run up Kunkel’s legal bills even after a judge denied their move to appoint a receiver for the dispensaries and Harvest has kept filing lawsuits trying to ‘split claims’. The arbitration hearing is set for the end of 2020 but, for now, Harvest doesn’t appear to be earning any revenue out of the Washington stores it boasted about in the deal announcement.
Published: July 15, 2020
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