Following news of Harvest Health & Recreation’s latest acquisition, officials at the Pennsylvania Department of Health issued a response to the company, calling the press release’s contents a “blatant misrepresentation.” Philadelphia Inquirer reporter Sam Wood III first reported this exchange.

On April 9, Harvest Health & Recreation announced that it had entered into a binding, definitive agreement to acquire CannaPharmacy Inc., which holds a grower-processor license in Pennsylvania along with other cannabis business licenses in Delaware, New Jersey and Maryland. The move, once approved and closed, would place Harvest operations in 213 cannabis facilities, 130 dispensaries and 17 U.S. states. But whether those assets mean that Harvest holds those business licenses is a matter that the Pennsylvania Department of Health is calling out. 

The health department threatened to revoke Harvest’s existing licenses because of how the company’s management was communicating its holdings in Pennsylvania.

CannaPharmacy is the owner of Franklin Labs LLC in Pennsylvania, which owns a 46,800-square-foot cultivation facility in Reading, Pa. Harvest’s management team touted this expansion of its Mid-Atlantic footprint in a press release announcing the M&A news.

John Collins, the department’s director of the Office of Medical Marijuana, wrote in his April 10 letter to Harvest Health & Recreation CEO Steve White that “permits are nontransferable [in Pennsylvania]. … Accordingly, even after completion of the acquisition, Franklin Labs LLC will retain ownership of the permit and Harvest Health & Recreation Inc. may not represent that it owns the permit issued to Franklin Labs LLC.”

Harvest’s transaction is “subject to satisfaction of customary closing conditions, including receipt of regulatory approvals in the relevant states,” according to the press release accompanying the news. It’s a standard provision of M&A transaction announcements, but this response from Pennsylvania authorities opens up a discussion about how licenses, as assets, are transferred in legal business acquisitions—in an industry predicated upon state regulatory approval.

“This is a new and particularly acquisitive time in the cannabis industry and many transactions involve assets that fall within a number of individual state regulatory systems,” a spokesperson for Harvest Health & Recreation told Cannabis Business Times. “Harvest will always evaluate its options in order to be fully compliant in any state in which it operates.”

But the Pennsylvania letter went beyond the M&A news.

A second concern brought up older business in Harvest’s mention of its existing Pennsylvania footprint: “Harvest currently has seven state licenses allowing up to 21 retail stores throughout the state,” according to the press release.

Individual companies are capped at five medical marijuana dispensary licenses in Pennsylvania, and each license allows that company to operate three storefronts—effectively limiting companies to 15 dispensaries. (This is according to Section 616 (3) of the state’s 2016 medical marijuana law. The language is specific: "The department may not issue more than one individual grower/processor permit to one person.")

The disconnect between the number of licenses Harvest Health & Recreation Inc. claims to hold in the state (seven, which exceeds the permissible count) and the number of licenses the state Department of Health perceives Harvest Health & Recreation Inc. as holding (zero) seems to be an issue of interpretation: At what point does a legal entity’s public image begin and end?

The licenses were neither awarded to nor filed under Harvest Health & Recreation Inc., but rather individual LLCs.

Case in point: In the second round of Pennsylvania medical marijuana dispensary business licensing (for which permits were awarded in December 2018), Harvest won six licenses for a potential total of 18 storefronts—again, a number that exceeds the state license cap. These applications, however, came in the form of different LLCs: Harvest of Southeast PA LLC, for example, and Harvest of North Central PA LLC. In each application, the same management team (that of Harvest Health & Recreation Inc. in Tempe, Ariz.) is cited.

Earlier, in 2017, in the state’s first round of medical marijuana dispensary business licensing, a company called SMPB Retail LLC, out of Arizona, won a license for a company called Harvest of Reading.

In total, seven LLCs with a connection to Harvest Health & Recreation Inc. in Tempe, Ariz., hold dispensary licenses in Pennsylvania. That allows for the potential of up to 21 dispensaries in the state, as Harvest plainly laid out in its press release.

But, still, according to the Department of Health letter, the state has an issue with how this information is being conveyed.

“Harvest Health & Recreation Inc. did not apply for, or receive, any permits in Pennsylvania.” Collins wrote (italics his). “Because each business is recognized as a separate legal entity under law, the department expects each to operate as independent entities as represented in the permit applications.

“Any continued misrepresentation that these entities are one in the same will be construed as a falsification of the permit applications and will result in the Office taking action against each entity, including possible revocation of permits,” Collins wrote.

Harvest Health & Recreation responded to Cannabis Business Times’ request for comment: “As a publicly-listed company operating in the cannabis space, we’re required to file public notice of intended acquisitions at an early stage in the process. Harvest is fully committed to always operating within state guidelines and working closely with Pennsylvania’s Department of Health on their medical cannabis program. We look forward to bringing a high-quality experience and serving patients in need throughout the Commonwealth.”

This sudden scrutiny from Pennsylvania Department of Health, however, comes soon after The Boston Globe’s Spotlight investigative team published the first article in a series on cannabis license transfers and an emergent web of business ownership in Massachusetts. The story raised questions about how large companies were circumventing state regulations to acquire—whether through outright ownership or management agreements of some sort—multiple cannabis business licenses that exceed a number allowed by state regulators.

The reporters at the Globe focused on Acreage Holdings and Sea Hunter.

In the case of Pennyslvania and the matter at hand, the state issued its dispensary licenses to seven distinct LLCs and now takes Harvest Health & Recreation Inc. to task for how that information is being communicated to the public.

With several blockbuster cannabis M&A deals already guiding the conversation about 2019 transactions, Cresco Labs came along and announced an April 1 move that set a new standard for market consolidation this year. The Chicago-based company entered into a definitive agreement to acquire all issued and outstanding shares of Canadian branding and distribution company Origin House (otherwise known as CannaRoyalty Corp) for C$1.1 billion. Origin House delivers more than 50 brands to more than 500 California cannabis dispensaries.

The move was described as the largest public company acquisition in the U.S. cannabis sector to date. Cresco Labs, founded in 2013, will now have a footprint that stretches across 11 U.S. states, 51 retail stores and 1.38 million square feet (all pending the regulatory approval of this and other transactions).

Greenspoon Marder partner Sander Zagzebski says that Cresco’s big move is another sign that the market consolidation trends observed in 2018 are naturally carrying over—and with greater impact—into 2019.

“We’re anticipating a significant increase in M&A activity, and this is very predictable,” Zagzebski says. “Cresco’s got a more nationwide footprint, and Origin is California. California is the largest legal weed market on the planet. … Right now, you have a lot of operators, a lot of scale and a ‘land grab,’ if you will, among the leading public companies to build scale, increase scale, increase capacity and hope to emerge as the leader—or one of the leaders—when the dust settles in the next few years.”

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Cresco had already laid claim to 592,000 square feet of cultivation space in California through an indoor cultivation network partnership signed in July 2018. The Origin House acquisition will add 92,00 square feet of cultivation space by the time the deal closes, which is expected in the second quarter of this year.

When that earlier California deal was made last summer, Cresco had only a three-state footprint in the U.S. The increase to 11 states is a testament to the sheer velocity of M&A activity in the cannabis industry.

“There’s a huge consolidation wave—I would say it’s coming, but it’s already here,” Zagzebski says. “‘Land grab’ isn’t meant to be a snub. These deals seem to make very strategic sense for both parties.”

More broadly speaking, the move speaks to trends that have seen sharp increases in cannabis company valuation—and deep-pocketed interest from outside the sector. As cannabis companies begin to trade on public markets (Cresco began trading on the Canadian Securities Exchange Dec. 3 under the ticker symbol “CL”), the influx of capital is not going unnoticed by larger firms keeping tabs on the nascent cannabis space.

Constellation Brands and Altria each made multi-billion-dollar investments in the Canadian cannabis industry last year, for instance.  

“Everybody seems to understand and accept that there are some very, very large players waiting on the sidelines to get into the game,” Zagzebski says. “They’re forced to be on the sidelines because the world they live in doesn’t allow them to make investments or acquisitions in U.S.-based cannabis companies yet. Federal illegality is an absolute bar.”

Anthony Tahlier

These players include major banks and private equity funds with the scale and liquidity to compete easily and aggressively once the U.S. legalizes a cannabis industry—in whatever shape that process takes.

As industry observers expect the M&A trends to pick up speed this year, so too will companies begin to restructure in a way that favors these multi-state operations and agile management teams.

As Cresco Labs CEO Charlie Bachtell said in a public statement following the deal: “This significantly accelerates our efforts to build the first national house of brands with broad and deep positions in the largest cannabis markets in the country. Cresco will have industry-leading brand development and distribution capabilities, which we believe will result in significant value creation for consumers and our shareholders alike as the market for medical-use and regulated adult-use cannabis continues to grow at a rapid pace.”

And that growth shows no signs of slowing down, what with more U.S. markets expected to come online this year (thought that remains to be seen, as state legislators continue to debate the merits of legalization in large states like New York, New Jersey and Pennsylvania). While the legal side of cannabis is growing at its own pace, companies like Cresco and others are setting the market’s terms.

“All of that sorting of winners and losers is starting to happen," Zagzebski says, "and I think big deals are part of the natural order of events as the larger operators—the people that can scale—are figuring out how to scale more aggressively on a timeline that … is rather compressed. I think legalization is—maybe not next year, but people are putting very large wagers that the feds are going to get out of people’s way sometime pretty soon.”