By Chris Walsh
For the second time in five months, a prominent medical marijuana company has found itself on the defensive after critical postings online set investors on edge.
Earlier this week, MedBox Inc. issued a shareholder letter to rebut an investigative article painting the company and its founder in a negative light. MedBox also had to defend its business strategy in Massachusetts, where several dispensary applicants voiced concerns about its heavy presence in the market and the founder’s background in a local newspaper article.
A similar scenario played out last May, when Medical Marijuana Inc. responded to a series of harsh accusations on blogs and stock message boards by issuing a shareholder letter that partially blamed short sellers interested in personal gains for the bad press.
MedBox and Medical Marijuana Inc. both said some of the critical reports contained inaccuracies and misleading information, and each brought up the possibility of litigation.
Here are six important takeaways from these ordeals – and how the companies responded to them – for cannabis professionals and investors:
#1. Publicly traded cannabis companies are in a much brighter spotlight than their peers in more mainstream, established and accepted industries. Most relatively small businesses – and their owners – don’t have to worry about reporters, bloggers and columnists digging into their past and writing lengthy articles magnifying their missteps and transgressions. But if you run a public cannabis company, don’t be surprised when someone in the media launches a deep investigation into your personal life and professional career. Remember that your past could come back to haunt you. Be prepared ahead of time – and have a strategy in place – to answer difficult questions.
#2. When responding to negative press – especially stories that detail a lengthy list of red flags that most investors would find concerning – it may be wise to acknowledge and admit that some mistakes may have been made (which Medical Marijuana Inc. did particularly well). Then focus on stating facts when rebutting errors in a story instead of simply talking about the negative coverage itself. And try to avoid the tendency to blame everything on short sellers, which is quickly becoming the default argument companies in many industries use when trying to explain away negative press and therefore doesn’t carry much weight.
#3. Sometimes the best way to deal with bad press is to ignore it entirely. Acknowledging and responding to critical news articles can backfire by drawing even more attention to them and prolonging the stories. Many companies instead choose to focus on generating positive press by highlighting recent progress, and they deal with concerned shareholders on a more individual basis.
#4. If you’re in the industry to make money prepare for criticism. Several dispensary license applicants in Massachusetts took aim at MedBox because it is an outside company that ostensibly has profits in mind over patients. As one applicant said: “I grew up in Massachusetts and my biggest fear is that for-profit companies parachute in and treat our patients like cash-paying customers, as opposed to what they are, which is patients.” Most businesses operate with profit as the end goal, including plenty involved in health care. But many MMJ companies are (unfairly) held to a different standard and are more or less expected to be philanthropists, including those like MedBox that provide ancillary services to the industry and don’t actually deal directly with patients.
#5. Investors would do well to keep a close eye on accounts receivables when examining publicly traded companies. Cash management is a huge challenge in the industry given the lack of banking options. So high accounts receivables levels (an issue MedBox is facing, as detailed in one of the recent critical reports) could cause huge cash flow problems if customers don’t pay up.
#6. Mentioning potential litigation in a press release or letter to shareholders can make the problem worse. Sure, investors often clamor on message boards for lawsuits after negative press. But, in the end, most shareholders don’t want to see a small, growing company involved in litigation, as it distracts the firm from its mission and could eat up valuable resources. Additionally, these types of cases – libel, slander, etc. – are rarely successful.
Also this week, Washington officially approved regulations on recreational marijuana businesses, moving the state’s adult-use program one giant step forward. The final rules mirror most of the proposed regulations issued last month.
Some highlights: The state will cap the number of retail shops at 334; entrepreneurs can start applying for business licenses on Nov. 18 but likely won’t be able to open until late spring or summer; out-of-state investments are banned; each entity and its principals are only allowed up to three producer or processor licenses in the state; and those applying for business licenses must be residents for at least three months.
By establishing formal regulations, Washington has laid the necessary groundwork for the recreational marijuana industry to materialize and puts the business opportunities in reach.
Other top stories in MMJ Business Daily this week: