Yet another lawsuit adds to Curaleaf’s problems

Multimate cannabis operator curafeuille (OTC: CURVE) has yet another case to settle after a quality control disaster last summer. The company will lose valuable money to fund its defense. And as market pressures mount and regulators tighten their grip on the company, these lawsuits could be just the start of the company’s woes. But don’t count Curaleaf just yet.

Labeling confusion brings Curaleaf to court

Last summer, reports surfaced that customers who purchased Curaleaf’s Select CBD brand were exposed to the psychoactive Delta-9 THC. Curaleaf says only one batch of its THC-containing product packaging was mislabeled as containing only non-psychoactive CBD. Without the proper labeling to guide them, some customers ended up ingesting a much larger and potentially more dangerous dose of THC than the company recommends.

Hundreds of people have been affected, including Earl Jacobe, an Idaho man who was hospitalized multiple times last summer for stroke-like symptoms, “to the point where he was basically in a coma,” and “then succumbed to an unrelated COVID-19 illness several weeks later,” according to Portland attorney Michael Fuller.

Curaleaf has settled 10 cases related to the incidents, but three remain pending, including the wrongful death lawsuit against Jacobe’s family. At the low end, payouts for wrongful death lawsuits can range from $500,000 to $1 million; at the high end, they can run into the hundreds of millions, or even billions of dollars when pharmaceuticals are involved.

Meanwhile, a new case is seeking class action status for even more plaintiffs. It is seeking a payment of $200 for each of its hundreds of reported plaintiffs, or their requested settlement amount, whichever is greater. As if that weren’t enough, the company is entangled in a web of lawsuits unrelated to a dispute with the owner of a bankrupt CBD company in which Curaleaf and others have invested. Together, these lawsuits place Curaleaf in risky financial territory.

Lawsuits cost money that Curaleaf cannot afford to lose

Curaleaf has $242.6 million in the bank – on the face of it, a respectable amount to avoid any lawsuit blues. Additionally, its $57 million in operating cash flow in the first quarter looks positive. However, $30 million of that income was eaten up by operating expenses in the first quarter, leaving Curaleaf with just $27 million of free cash flow to reinvest in the business or fund purchases.

The company quickly spent all that and more on acquisitions — a total of $67.9 million in the first quarter, including the first installment of its $211 million purchase of Arizona dispensary chain Bloom. Curaleaf will pay the remainder of the purchase price in annual installments of $50 million to $60 million 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 profit up 21%. This could bode well for its ability to pay those bills – if Curaleaf weren’t faced with so many other potential expenses.

When you add the threats of lawsuits to the expensive acquisitions, Curaleaf may need to raise more cash 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 flow problems may only get worse when Oregon regulators take action later this year.

No more issues disrupting 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 disputes. 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 facilities. Due to the nature of cannabis processing, plant material must remain frozen or risk becoming contaminated with mold when not in use. And many processes cannot be stopped once started. It will be slow and potentially costly for Curaleaf to restart its Oregon plant once the suspension expires.

Curaleaf will likely have to settle the wrongful death lawsuit. THC is a Schedule I narcotic under the Controlled Substances Act, making it a likely candidate for significant jury or arbitration settlement. A final payout for the class action seems harder to predict right now, when plaintiffs number in the hundreds. But costs will mount for the beleaguered MSO even before a settlement amount is announced. Potential revenue losses due to suspension, exceptional acquisition costs and macroeconomic pressure in the global market are not positive in the short or long term for Curaleaf.

Curaleaf’s current price-to-sales ratio of around 3.4 is well below its five-year average of around 21%, suggesting marijuana stock investors aren’t too thrilled with the company’s woes. . In the short term, his legal troubles will continue to drive down the company’s share price. But Curaleaf’s significant US presence in many of today’s largest legal states and its ability to move quickly to enter new legal markets suggests that Curaleaf is here to stay.

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Fool contributor Lukas Barfield has no financial position in the companies mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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