Harvest Inc., an Arizona-based marijuana conglomerate, said on Tuesday it would appeal Pennsylvania’s decision to revoke the permit of an affiliated cannabis grower that was effectively put out of business for not following the most basic security regulations.

The action Monday by the Pennsylvania Department of Health marked the first time that the agency has decided not to allow a medical marijuana company to renew its permit to grow cannabis. The company, AGRiMED Industries of Pennsylvania, was cited July 1 for “flagrant disregard” of the regulations that included missing marijuana plants, nonfunctioning security cameras, and the inability to produce required records.

AGRiMED has 30 days to appeal the state’s decision. But it’s unclear if AGRiMED is still functioning. Calls to AGRiMED went unanswered.

Another question is: Does Harvest — which currently has an arrangement to operate AGRiMEDs facility — have the standing to challenge the state?

Harvest, which has cannabis operations in multiple states, said it had struck a “management services agreement” (MSA) in a contract finalized May 17.

Harvest said the state’s decision to revoke AGRiMED’s permit “unfortunately penalizes Harvest for alleged mismanagement of prior ownership.”

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However, the state’s surprise inspection of the AGRiMED growhouse in Carmichaels, Greene County, occurred on June 6, after the contract for the MSA was finalized.

Harvest already is in a legal tussle with the state over issues of ownership. Earlier this year, Harvest Inc. claimed it controlled seven dispensary permits to sell marijuana in Pennsylvania. State law caps the number of permits at five.

Harvest backed down from the claim, stating that individual LLCs under its corporate umbrella held each permit. The state has demanded that each Harvest LLC prove it is independently operated. The state threatened to revoke Harvest’s permits if it could not comply.

Tanya Hoke is the managing director of Galen Diligence, a Cambridge, Mass., firm that provides corporate governance and due-diligence consulting for the international cannabis industry.

“We don’t have a lot of examples of licenses being revoked,” said Hoke, whose firm is not working for Harvest. “I especially don’t know any examples of a license or permit being revoked when a company is in the gray zone of trying to transfer corporate ownership or control.”

In addition, she said it was unusual for a company to complain that it’s being unfairly punished for a takeover target’s prior mistakes.

“It really doesn’t make sense,” Hoke said. “It’s fairly common for a company to become responsible for the compliance issues of any company that it acquires. That’s why an acquirer does due diligence — to understand what those issues may be and adjust the price accordingly, or require that the issue is resolved before the acquisition closes.”

However, one business entity may buy future revenues of a permit holder through a multimillion-dollar “management services agreement” (MSA).

“The permit and the facility are owned by AGRiMED and, in the eyes of the Department of Health, the facility continues to be run by AGRiMED,” said April Hutcheson, director of communications for the Department of Health.

Hutcheson said the state wasn’t taking an action against Harvest. In the eyes of the state, Harvest doesn’t have an ownership claim on AGRiMED.

It is unclear what will happen to Harvest’s ability to follow through on the MSA if there is no underlying permit.

Hutcheson said the state has not made a decision on whether AGRiMED’s permit will be awarded to another applicant. State law allows for 25 growers, and if AGRiMED’s permit is revoked, 24 would be in operation.

Harvest’s full statement to The Inquirer follows:

The Department of Health’s unexpected decision to deny the renewal application of AGRiMED Industries of PA, LLC was based, in large part, on alleged failures of prior management of AGRiMED that occurred prior to Harvest’s acquisition of the company.

That acquisition was not completed until May 17, 2019. Despite the recent change in management of AGRiMED, and Harvest’s diligent efforts to raise the operational standards to set the beleaguered company on a compliant track, consistent with Harvest’s industry-leading operational standards, the Department appears to have adopted a cumulative effect to infractions related to the license. A license which, under DOH regulations, has never been transferred to Harvest.

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The Department’s decision unfortunately penalizes Harvest for alleged mismanagement of prior ownership.

While Harvest intends to take all necessary legal action to address the AGRiMED issue, Harvest will continue to work cooperatively with the Department to differentiate its management from the legacy operators of AGRiMED, and will continue to demonstrate its full compliance with Pennsylvania medical marijuana program rules. Harvest believes it is fully aligned with the Department’s mandate to ensure compliance with its regulations.

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