merger Archives - Green Market Report

Debra BorchardtJanuary 21, 2020

Two weeks ago, Harvest Health & Recreation Inc. (CSE: HARV)(OTCQX: HRVSF) filed suit against Falcon International, Inc. asking to terminate the planned merger agreement and return the money Harvest paid to Falcon under the Merger Agreement. That lawsuit alleged that Falcon’s principals stalled due to the falling share price of Harvest. Harvest went on to suggest that Falcon International engaged in illegal activities.

Today, Falcon has said that Harvest owes the company $50 million in a breakup fee. In addition to that Falcon said, “Amounts previously funded by Harvest to Falcon are convertible into Falcon equity at Harvest’s or Falcon’s option and, accordingly, are unlikely to be paid.”

Headed To Divorce Court

The original merger agreement dates back to February 2019, when cannabis stocks were still firmly in green territory, but then the bear market took hold and the entire sector saw stock valuations plummet. There was no provision in the merger agreement with regards to a stock selloff and according to the lawsuit, Falcon executives James Kunevicius and Edlin Kim wanted to renegotiate the Merger Agreement which resulted in the June
7, 2019 Amendment. This increased the stock consideration to $240 million.

Harvest stock was trading roughly around $7.47 a share in February 2019, by August it was down to $3.19. It has lately recovered and was recently trading near $3.51, above its 52-week lows of $2.03.

Harvest said that by August and September, it had loaned Falcon roughly $47 million and still hadn’t closed the merger. Falcon began demanding more money according to Harvest suggesting Harvest would be in breach if it didn’t pay. Harvest was now questioning the use of the money that had already been sent. Despite that, it still looked like the merger would close in October 2019. This is when Falcon began filing “standstill agreements” and essentially stalled the closing process.

The two companies met at the MJ Biz Conference in Las Vegas in December. Harvest described it in this manner, ”

“The business meetings at the convention were non-productive, with one Falcon representative (Edlin Kim) appearing at the meeting with visibly large amounts of cash in his front pocket and back pocket and in a bag, and wearing what appeared to be many tens of thousands of dollars in men’s jewelry made of gold, and with both Falcon representatives (Edlin Kim and James Kunevicius) expressing no interest in doing any work to move the planned transaction with Harvest forward and, instead, stating openly that Falcon would not close the Merger Agreement, as amended, due exclusively to the decline in Harvest’s stock price.”

Harvest Lawsuit

The lawsuit from Harvest claimed that Harvest had performed all of its legal obligations, but that Falcon did not produce auditable financial information or records concerning its business operations and revenue despite repeated requests. Harvest also accused Falcon of transporting cannabis across state lines and that the company was not complying with California state law regarding the regulation of sales of marijuana.

Harvest said in the lawsuit that it has paid over $50 million in cash and advances, but that Falcon executives complain about being unhappy about the deal. Harvest said it wants its money back. Harvest also claims that Kunevicius and Kim pocketed a $4 million payment that was supposed to go to the company and have no intention of paying the money back and believe they are entitled to it.

Debra BorchardtMarch 4, 2019

Cannex Capital Holdings Inc. (CSE: CNNX)(OTCQX: CNXXF) moved beyond the interim agreement from November and as of March 1, 2019 officially agreed with 4Front Holdings, LLC to merge the two companies. The new company will initially trade under Cannex’s symbol “CNNX”, although the company said it expected to receive a new ticker in connection with the transaction.

The deal is subject to CSE approval, approval of the 4Front members and approval of at least 66 2/3% of the votes cast by Cannex shareholders at a special meeting expected to take place on April 18, 2019. The company said it has commitments from 68% to vote in favor.

The number of Cannex Consideration Shares was determined by way of a previously agreed ratio such that the shareholder ratio will proportionally equal 1:1.75 Cannex shareholders to 4Front shareholders on the closing of the Transaction. The Exchange Ratio was determined when the parties entered into the interim agreement (announced on November 26, 2018). The pre-agreed ratio provides for a pre-Transaction value to 4Front shareholders of approximately C$321.5 million calculated using a Cannex share price of C$1.125 per share.

“Since starting 4Front with Kris Krane in early 2011, we’ve focused on building a company the right way, navigating the evolving landscape and trying to work with people we respect and trust. We’ve known Leo since late 2016 and have great respect for what he and his team built in Washington,” said Josh Rosen, CEO of 4Front. “I believe Cannex is the perfect match for 4Front and that our merger is representative of our belief that the industry is evolving from a game of Monopoly, where it’s about the perceived value of assets, to the game of Risk, where it’s about the combination of assets, strategy, and execution. Cannex is all about execution and I’m already seeing the impact of the Cannex culture on our 4Front team and I look forward to closing this transaction and the full integration.”

The new company will feature Joshua Rosen as the CEO & Director, David Daily, Director, Eric Rey, Director, Leo Gontmakher, COO & Director and Anthony Dutton, Director. The board of directors of the new company will be comprised of five directors, with one executive director from each of Cannex and 4Front and three mutually agreed upon directors. Cannex and 4Front have agreed to a $10 million termination fee.

“Success in the cannabis market is directly related to a company’s ability to profitably scale operations, access and efficiently allocate growth capital all being driven by an experienced management team,” said Leo Gontmakher, COO of Cannex. “With 4Front, we have a partnership across all elements of the combined company with a shared management philosophy of driving best practices throughout all our operations. I am very excited,” continued Gontmakher, “to immediately take the operational leadership we have developed in Washington State to five new states.”

The merger will create a strong operator with expertise across the cannabis value chain, including cultivation, manufacturing, workflow, packaging, distribution, and retail at scale, led by a team with longstanding industry credibility and strategic M&A capabilities. The initial collaboration in Massachusetts and Illinois is already in motion, while collectively laying the groundwork in new states including Arizona, California, and Michigan.

“This is a transformational event for Cannex as we will immediately become operational in six US states with a platform that can be replicated and leveraged into additional jurisdictions,” said Anthony Dutton, CEO of Cannex. “Since our original formation, Cannex has been strategically focused on building vertically integrated operations in multiple states and, upon closing the business combination with 4Front, we expect to become one of the largest multi-state operators in North America with room for continued growth.”

Debra BorchardtDecember 19, 2018

Aleafia Health Inc. (TSXV: ALEF) is acquiring Emblem Corp. (TSXV: EMC, OTCQX: EMMBF) are in an all-stock deal valued at approximately $173.2 Million. The combination will create Canada’s largest medical cannabis clinic network with 40 clinics and education centers.

Aleafia’s stock slid slightly by 1% to $1.05, while Emblem’s stock jumped over 13% to lately trade at 81 cents on the OTC Markets.

As a result of the acquisition, Aleafia’s patients will get access to Emblem’s products including capsules, oils and oral sprays. They will also get access to the Emblem e-commerce platform. Aleafia will also get to use Emblem’s license to process medical cannabis products and sell these directly to the patients.

“The Emblem acquisition rapidly accelerates the execution of Aleafia’s strategy to become a vertically integrated, diversified cannabis company. It is difficult to overstate the significance of securing the highest quality medicine for our patients and Aleafia,” said Aleafia Health CEO Geoffrey Benic. “Emblem’s product leadership in the medical and adult-use sectors and highly coveted supply agreements will perfectly complement Aleafia’s cannabis production and clinic operations.

Aleafia said that it expects to leverage Emblem’s approval to supply to the Provinces of Ontario, Saskatchewan, British Columbia and Alberta; national medical distribution through Shoppers Drug Mart; and national retail distribution through Fire & Flower, Starbuds and the emerging OnePlant network. The statement said that through Emblem’s joint venture with German pharmaceutical wholesaler Acnos Pharma GmbH, Aleafia will gain to access that medical cannabis market serving more than 82 million people, with access to approximately 20,000 pharmacies, along with access to Australia’s burgeoning medical cannabis market upon completion of Aleafia’s previously announced transaction with CannaPacific Pty Ltd.

“Emblem’s patient-focused product portfolio and strength in patient education, conversion and retention through GrowWise will be further bolstered by the patient acquisition capabilities of Aleafia’s Canabo clinics. The combination of the companies will form a fully integrated market leader in the medical cannabis sector, with industry-leading patient counts, and the ability to immediately capitalize on full revenue potential,” said Emblem CEO Nick Dean. “Furthermore, our renowned national brands, robust footprint in emerging value-added products, and strong domestic and international growth opportunities will cement our position of strength in this highly competitive market.”

Terms Of The Deal

According to the statement, the agreement calls for Emblem shareholders to receive 0.8377 of an Aleafia common share in exchange for each Emblem common share, representing the equivalent of $1.21 per Emblem Share and a premium of 27.0% based on the closing prices of Aleafia and Emblem Shares on the TSX Venture Exchange on December 18, 2018. The shares were lately trading at C$1.40. When the deal is completed, it is expected that existing Aleafia and Emblem shareholders will own approximately 59.0% and 41.0% of Aleafia, respectively, on a fully diluted in-the-money basis.

Aleafia and Emblem said in the stament that they currently have access to a combined CAD $69.9 million in cash, to be used for continued product innovation and brand building, construction and development of their cultivation facilities and outdoor grow operations, to support expansion efforts and to pursue strategic opportunities and investments that maximize shareholder value.