Another ill-timed marijuana merger has fallen apart and the breakup is more dramatic than usual. Arizona-based Harvest Health & Recreation (OTC:HRVSF) recently filed suit against Falcon International, a California-based company that would have expanded Harvest's footprint in the largest legal market in the U.S.
Last February, Harvest Health agreed to an all-stock transaction that would have worked out to $155 million upfront plus another $85 million if the stores purchased from Falcon met revenue targets.
Harvest alleges Falcon failed to produce auditable financial records, which suggests the company can walk away from the deal without incurring any penalty. Harvest shareholders hope a judge agrees because California is just about the last place a multistate operator wants to expand in right now.
Sales of marijuana in California are stronger than ever, just not the legal kind. New taxes drove consumers into the arms of the black market following the legalization of adult-use sales.
Instead of backing off, on Jan. 1, 2020, California raised taxes on cannabis even further. The mark-up rate for arm's length transactions (meaning buying cannabis from an outside vendor rather than producing in-house) increased from 60% to 80% and the cultivation tax rose from $9.25 per ounce to $9.65 per ounce.
Exorbitant taxation isn't the only deterrence that multi-state operators face in California. In November, the state suspended 407 permits for marijuana businesses that hadn't taken the necessary steps for the track-and-trace program, effectively halting operations of retailers and the distributors they rely on.