Multistate cannabis operator Curaleaf (CURLF 0.66%) has yet another court case to deal with after a quality-control catastrophe last summer. The company will lose precious cash funding its defense. And as market pressures rise and regulators tighten their grip on the company, those lawsuits may be only the beginning of the company's woes. But don't count Curaleaf out just yet.
A labeling mix-up lands Curaleaf in court
Last summer, reports emerged that customers who bought Curaleaf's Select CBD brand were exposed to psychoactive Delta-9 THC. Curaleaf says a single batch of its packaging mislabeled products containing THC as containing only non-psychoactive CBD. Without the right labeling to guide them, some customers ended up ingesting a far bigger and potentially more dangerous dose of THC than the company recommends.
Hundreds were affected, including Earl Jacobe, an Idaho man who was hospitalized with stroke-like symptoms multiple times last summer over a week, "to the point where he was essentially comatose," and "then succumbed to an unrelated COVID-19 disease several weeks later," according to Portland attorney Michael Fuller.
Curaleaf has settled 10 cases related to the incidents, but three remain unsettled, including Jacobe's family's wrongful death suit. On the low end, wrongful death lawsuit payouts can range from $500,000 to $1 million; on the high end, they can stretch into the hundreds of millions or even billions of dollars when pharmaceuticals are involved.
Meanwhile, a new case seeks class-action status for even more plaintiffs. It's asking for a payout of $200 for each of its hundreds of reported plaintiffs, or their asked-for settlement amount, whichever is greater. As if that weren't enough, the company is entangled in a web of unrelated suits over a dispute with the owner of a failed CBD company in which Curaleaf and others invested. Together, these suits put Curaleaf in risky financial territory.
OTC: CURLF
Key Data Points
Lawsuits cost cash Curaleaf can't afford to lose
Curaleaf has $242.6 million in the bank -- at first glance, a respectable amount on hand to head off any lawsuit blues. Furthermore, its $57 million in operating cash flow in the first quarter looks like a positive. However, $30 million of that income was eaten up by operating expenses in Q1, leaving Curaleaf with only $27 million in free cash flow to reinvest in the business or fund purchases.
The company promptly spent all that and more on acquisitions -- a total of $67.9 million in Q1, including the first installment of its $211-million purchase of Arizona dispensary chain Bloom. Curaleaf will pay the rest of the purchase price in $50 million to $60 million annual installments over the next three years.
The company's revenue grew 20% year over year in the first quarter of 2022, with gross profit up 27% and operating income up 21%. That might bode well for its ability to pay those bills -- if Curaleaf weren't facing so many other potential expenses.
When you add the lawsuit threats to the costly acquisitions, Curaleaf may need to raise more funds by selling more shares or taking on more debt to stay competitive, a feat made all the more difficult by rising inflation and the threat of a recession. And Curaleaf's current cash woes may be only compounded when Oregon regulators take action later this year.
More problems harshing Curaleaf's buzz
The Oregon Liquor and Cannabis Commission is threatening Curaleaf with a 70-day license suspension and a record $200,000 fine, which Curaleaf is contesting. While the latter looks like a drop in the bucket, the former punishment could really hurt. During a suspension, Curaleaf would not be allowed to sell, deliver, process or do anything else with cannabis at its Oregon facility. Due to the character of cannabis processing, plant material must remain frozen or risk contamination by mold when it's not used. And many processes can't be stopped once started. It will be slow and potentially costly for Curaleaf to restart its Oregon facility once the suspension has expired.
Curaleaf will likely have to settle the wrongful death lawsuit. THC is a Schedule I narcotic under the Controlled Substances Act, making it a probable candidate for a large settlement from a jury or through arbitration. A final payout for the class action lawsuit looks harder to predict right now, as plaintiffs get into the hundreds. But costs will mount for the embattled MSO even before a settlement amount is announced. Potential revenue losses from a suspension, outstanding acquisition costs, and macroeconomic pressure in the global market aren't positives in the short or long term for Curaleaf.
Curaleaf's current price-to-sales ratio of roughly 3.4 is far below its five-year average of around 21%, suggesting that marijuana stock investors aren't too thrilled about the company's misfortunes. In the short term, its legal woes will continue to drag down the company's stock price. But Curaleaf's large U.S. presence in many of the biggest current legal states, and its ability to move quickly to enter new legal markets, both suggest that Curaleaf is here to stay.
