Harvest Health & Recreation Inc. (OTCQX: HRVSF) said it has settled its dispute with a small group of the previous owners of Interurban Capital Group. The disagreement goes back to March when Harvest had agreed to pay $85.8 million through Harvest stock and the assumption of $19.1 million of debt convertible into 205,594 Multiple Voting Shares. Plus a payment of an additional $9.3 million upon exercise of a call option agreement to acquire controlling interests in five Washington cannabis dispensaries or alternatively $12.4 million to acquire substantially all of the assets of these dispensaries.

It wasn’t long before Harvest decided to sue ICG in April against the Washington dispensaries and a small group of the previous owners of ICG to enforce terms of service agreements and the call option agreements.

“We are pleased to settle this dispute and move forward,” said Chief Executive Officer Steve White. “We are very excited to continue to focus on our core business operations as we execute on our plan to return to profitability.”

Settlement Agreement

The settlement resulted in a mutually agreeable resolution for all parties. Harvest said it will cancel a total of 42,378.4 Multiple Voting Shares issued to the small group of previous owners of ICG (equivalent to 4,237,840 Subordinate Voting Shares on an as-converted basis). Harvest will also receive a $12 million secured promissory note with 7.5% interest and five-year maturity. The settlement includes cancellation of the service agreements and call option agreements for the Washington retail locations.

Back Story

ICG would have added to Harvest’s existing retail footprint with three open retail locations and seven potential retail licenses in California, five open retail locations in Washington state and two open retail locations in Iowa. The California locations were dispensaries called Have-A-Heart and trouble began almost immediately. The employees complained about layoffs to Marijuana Business Daily, and in April it was learned that Harvest was suing ICG. The company has since sold those properties, but the litigation remains.

ICG and its Washington partners are also fighting amongst themselves. Harvest Health wrote in its SEC filing that on May 28, 2020, ICG filed a complaint in the King County Superior Court against the Respondents and other members of the Washington Retailers and their wives alleging a breach of the Washington Entities Options collectively, by the “Washington Entities Sellers”, who sold the properties to Harvest Health. The case alleges a series of charges, including breach of contract and, engaging in unfair or deceptive acts or practices.

The filing stated: In April, Harvest Health filed a Notice of Intention to Arbitrate before the Judicial Dispute Resolution, LLC in Seattle, Washington against Boyden Investment Group, LLC; Tierra Real Estate Group, LLC; Have A Heart Compassion Care, Inc.; Phat Sacks Corp.; Green Outfitters, LLC (collectively, the “Washington Entities”) and Ryan Kunkel (“Kunkel”, together with the Washington Entities, the “Respondents”) to compel mandatory arbitration for breach of contract, engaging in unfair or deceptive acts or practices in the conduct of the Respondents trade or commerce and affects the public interest, tortious interference with contractual relationships, and awards of damages, treble damages, and fees and costs.

Ryan Kunkel is a former officer, director and shareholder of ICG and manager and equity holder in the Washington Entities. The Arbitration relates to Amended and Restated Services Agreements entered into between ICG and the Washington Entities pursuant to which they agreed to pay ICG fees for services it provides to them (the “Service Agreements”). On
April 2, 2020, the Respondents filed a motion for temporary restraining order in the Superior Court for the State of Washington, in and for the County of King, seeking access to certain records and accounts related to the operation of the Washington Entities’ business. On April 7, 2020, the court denied the motion in the TRO Action and found, among other things, that the Retailers failed to show (i) they were likely to prevail on their claim that ICG breached the Service Agreements, (ii) a clear legal or equitable right to the relief sought, (iii) an invasion of their rights, and (iv) they would suffer an actual and substantial injury.

On April 8, 2020, the Respondents filed a motion for dismissal of the TRO Action and the case has been dismissed. In a separate lawsuit, ICG filed a petition for provisional remedies in aid of arbitration against each of the Washington Entities seeking prejudgment writs of attachment as a result of the Respondents’ conduct related to the termination of the Service Agreements (the “Provisional Remedies Action”). Following consolidation of the Receiver Action and the Provisional Remedies Action before the Superior Court, the case was dismissed on May 21, 2020 because the court ruled it lacked jurisdiction as a result of the appointment of an arbitrator in the Arbitration. In dismissing the Provisional Remedies Action, the Superior Court noted that the arbitrator should make the decision on ICG’s petitions for provisional remedies. The Arbitration is in the pleading stage of litigation, no discovery has commenced and no substantive rulings have been made other than the TRO Order.