News this week highlights why cannabis companies should take a cautious approach to expansion.
In a headline Thursday that read, “Pennsylvania cracks down on Big Marijuana, threatens to shut out biggest permit holder,” Philly Inquirercannabis reporter Sam Wood underscores the risk in expanding too quickly. Pennsylvania regulators are threatening to revoke the permits of a Phoenix-based company that holds the rights to open the most medical marijuana dispensaries in Pennsylvania.
The action targets Harvest Health and Recreation, which announced Tuesday that it is acquiring CannaPharmacy, an operator in Pennsylvania under Franklin Labs, LLC. The acquisition also includes New Jersey-based Garden State Dispensary.
It may seem that a verbose press release about rapid expansion is a boon to cannabis companies which are expanding in states like Pennsylvania. But as we learned, such self-serving news releases and exploitive expansion practices could actually put a company at a significant competitive disadvantage. You can’t operate a cannabis company when state regulators pull your licenses, and that is exactly what Harvest Health and Recreation is facing in Pennsylvania.
In a poorly executed news release, Harvest bragged about a multimillion-dollar deal to acquire CannaPharmacy, making it one of the biggest marijuana companies in the nation. In the company’s haste to expand faster than what is prudent, Harvest may have committed malpractice. The company claimed rights to open 21 retail marijuana dispensaries. That contradicts the state medical marijuana law, which caps the number of dispensaries a company may operate at 15 and prohibits transfer of permits.
The Inquirer story has gone national, and is being viewed as a sign of a spiraling cannabis industry. What the article highlighted was a proliferation of cannabis companies that are placing greed over prudent business decisions. This was also highlighted in an earlier story by the Wall Street Journal.
We also see the risk in expanding too quickly by examining publicly traded cannabis companies like California-based MedMen. AS CNBC recently reported, “Cannabis retailer MedMen’s financial troubles are a warning for the marijuana industry.” The company is racing to raise cash to cover its mounting losses.
CNBC writes, “During the last six months of 2018, MedMen lost $131 million — more than $2 for every dollar in marijuana it sold. To cover those losses and fund its expansion plans, MedMen raised almost $200 million from September through November. That money is already gone. At year-end, MedMen had around $80 million in the bank. That is four months of cash, based on how quickly it lost money last fall.”
Cannabis companies should have no interest in operating loss or raising the ire of regulators. All across the nation, a focus is on behemoth cannabis companies expanding too quickly. On the presidential campaign trail, candidates are placing a spotlight on the issue, anchoring the conversation to equity. We anticipate federal regulations on the subject in passage of cannabis banking reform in Congress. Meanwhile, the SEC continues to take actionsagainst bad actors in the cannabis industry who are defrauding investors.
Given the increasing government, media and political attention, cannabis companies should look to take the responsible, cautious approach. As the idiom goes, “Slow and steady wins the race.”