Curaleaf Holdings Stock Is Flashing a Warning Sign

Curaleaf Holdings (CURLF) has rapidly expanded to the point of starting to become the face of the U.S. cannabis industry. Yet, while doing so, it has become inexcusably sloppy in its operations, and it needs to get it's house in order before it has a material impact on its business.

While the company has enjoyed a nice rebound recently after the bad news drove its share price down, based upon its long-term growth potential and its narrative seeming to be still in place, there are a number of concerns from its dropping the ball in a number of areas that suggest its growth trajectory is no longer a sure thing.

It appears to be that Curaleaf is getting so aggressive it's forgetting to focus on the many smaller things that are part of the cannabis business - especially in regard to the regulatory side - and it has already cost the company money and some loss of reputation, at a time when it should be considered one of the top cannabis companies in the world based upon its performance, rather than its weak self-governance raising questions concerning its ability to successfully navigate regulatory requirements.

Failures and the associated risk

The U.S. Food and Drug Administration (FDA) sent a public letter to the company in July, telling Curaleaf it had a couple of weeks to explain what it had done to correct violations associated with claims on its website and social media, concerning the healing properties of CBD products.

For example, on its website it stated CBD includes “properties that counteract the growth of spread of cancer” and is also “linked to the effective treatment of Alzheimer’s disease.” This is especially egregious in light of the fact the vitamin and supplements industry have had to abide by these standards for a long time. This shouldn't have even been an issue for the company.

After the news came out, a number of law firms have been active in filing class action suit against the company.

Next, Curaleaf failed to disclose a change of ownership structure related to its cannabis operations in the state. A spokesman for the company said it was a "technical matter," adding it was a “good-faith misinterpretation” of the requirements.

The Massachusetts Cannabis Control Commission thought it wasn't as benign as asserted, and the company paid $250,000 to settle.

Last, the Commission also said it was concerned about Curaleaf exceeding the allowable size allowed in Massachusetts. The company has stated that "it would acquire three licenses in addition to the two medical dispensaries in Hanover and Oxford and three planned recreational shops in Oxford, Provincetown and Ware," according to Boston Business Journal.

Curaleaf said the above statement was an error, and had no intention of operating in the state outside of allowable size parameters.

With a production capacity limit of 100,000-square-feet in the state, and a transaction being talked about with another company, the Commission said it'll be closely watching what comes out of that.

Conclusion

It's very obvious that Curaleaf has some significant issues concerning compliance, focus, and self-governance in areas that shouldn't be that difficult to align with.

If the company doesn't get its act together, it could find itself receiving more scrutiny, and with its loose ways, could end up facing problems that are totally of their own making, at a time it should be attracting attention from fundamentals, its growth trajectory and long-term revenue potential, unobstructed by self-inflicted wounds. It makes you start to wonder what else is going to be discovered going forward.

For now the company is probably going to maintain momentum, but it needs to appoint a determined, committed and talented person to ensure these things don't continue to happen.

When small failures like this become a pattern, a doesn't take long before a series of mole hills become a mountain. Curaleaf needs to do much better in overseeing its compliance issues before they become problems that aren't going away and difficult to solve. Now is the time to commit to excellence in this aspect of the company.

After all, if it's sloppy here, where else is it taking its eyes off the ball?

It’s obvious regulators are not happy with the company, and that is potentially a significant risk.

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Disclosure: No position.

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