Canopy Growth weighs on the marijuana sector after uncovering an error in earnings report

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February 21, 2019 1:09pm NYSE:MJ

marijuana stocks

From Ciara Linnane: Less than a week after posting quarterly earnings, Canopy Growth Corp., the largest cannabis company by market value, has had to issue a correction.


The Smiths Falls, Ontario-based company said it is restating one metric in last week’s fiscal third-quarter and nine-month earnings release after a formula error in a spreadsheet. Unfortunately, the metric in question is one the company has advised analysts and investors to look to as the best measure of its underlying business.

The company said the nine-month adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) figure should have been C$155.2 million ($117.8 million) but was incorrectly stated as C$69.0 million. “The Adjusted EBITDA loss for the three months ended as December 31, 2018 was correct as reported, as were all prior quarters as released,” the company said in a statement.

The news highlights some of the teething problems cannabis companies are facing in the early stages of the new legal sector. Canopy posted its numbers much later than expected last Thursday night, entering the numbers in the Canadian securities regulator’s database just before a 45-day deadline elapsed.

The company reported a 282% increase in quarterly revenue as marijuana became legal in Canada, but earnings were slammed by paper losses and accounting quirks that may be unfamiliar to U.S. investors. Canadian companies use a different accounting standard to GAAP, or Generally Accepted Accounting Principles, the one U.S. companies are required to follow.

For example, a mark-to-market adjustment of convertible senior notes chopped C$185.8 million from Canopy’s profit, part of the effects of a turbulent market for pot equities. That loss was removed from diluted earnings per share but not basic EPS, so a 22-cents-a-share profit turned into a 38-cents-a-share loss on the next and final line.

Canadian accounting rules also stipulate that companies account for biological assets, their pot plants, at different stages, which means they must guess how much the plants are worth before actually selling them. In a young market with no futures prices to rely on, that is a tricky calculation, as evident in recent reports.

And like many new sectors, the cannabis business has already seen its share of shareholder manipulation and self-dealing by executives, as MarketWatch has reported. Just last week, Aphria Inc. said an investigation of acquisitions in Argentina, Colombia and Jamaica found that some directors had conflicts of interest. The company’s CEO Vic Neufeld and co-founder Cole Cacciavillani are leaving their roles in March, although they will stay on as advisers.

Canopy shares CGC, -2.65% WEED, -2.30%  were down 1.3%, even as Piper Jaffray said it remains bullish on the company.

“We continue to estimate a $250-500B potential long-term global cannabis market, with a $15-50B near-term opportunity,” analysts Michael Lavery and Jeffrey Kratky wrote in a note. “We expect intellectual property, value-added products, and form factor evolution to be key long-term drivers for the company.” Piper Jaffray rates the stock as overweight with a $60 price target, equal to 33% upside from its current trading level.

Seaport Global initiated coverage of the cannabis sector on Thursday, assigning buy ratings to Aphria Inc. APHA, +2.81% Hexo Corp. HEXO, -0.92%  ,HEXO, -0.76%  Green Organic Dutchman TGODF, -0.15%  , TGOD, -0.54% KushCo Holdings Inc. KSHB, +2.96% MedMen Enterprises Inc. MMNFF, -0.66%Green Thumb Industries Inc. GTBIF, +6.41% Acreage Holdings Inc.ACRGF, -0.75% iAnthus Capital Holdings Inc. ITHUF, -1.89%  and Curaleaf Holdings Inc. CURLF, -1.08%

It has neutral ratings on Canopy, Tilray Inc. TLRY, -0.51%  and Aurora Cannabis Inc. ACB, +0.33% ACB, +0.22%

Seaport is expecting the global market to come close to $640 billion by 2040 with the U.S. alone potentially climbing to $94 billion. The research firm on Thursday published a more than 200-page report on the sector that covers everything from individual companies to trends, regulations and a history of the plant.

In a section devoted to CBD, or cannabidiol, analysts predict that the U.S. Food and Drug Administration will move to update its stance on the non-psychoactive ingredient found in cannabis and hemp that is widely held to have wellness properties. The recent U.S. 2019 Farm Bill fully legalized hemp for commercial use, but the FDA has retained a ban on adding CBD to food or drinks because it has not been fully researched. The agency has issued guidelines for the many companies eager to launch CBD-infused drinks and food products and has promised public talks on the matter, but for now companies are in a state of limbo.

Seaport believes it is just a question of time and noted that many smaller, local manufacturers are ignoring the ban.

A a bipartisan group of lawmakers sent a letter to the FDA last week, urging immediate action on the matter. A series of recent actions in New York City, Maine and Ohio cracking down on the sale of CBD foods and drinks have “spurred a tremendous amount of confusion among product manufacturers, hemp farmers, and consumers of these products,” said the letter, as reported by Weedmaps, an information community website for businesses and consumers.

Hexo shares were up 1.1%, Aurora was up 1.7%, Cronos was up 2.2% and Tilray was down 2.4%.

The ETFMG Alternative Harvest ETF MJ, -0.03%  was down 0.1%, and the Horizons Marijuana Life Sciences ETF HMMJ, +0.05%  was up 0.3%. The S&P 500SPX, -0.15%  and the Dow Jones Industrial Average DJIA, -0.20%  were both down about 0.4%.


Canopy Growth Corp. (CGC) was trading at $44.96 per share on Thursday afternoon, down $1.31 (-2.83%). Year-to-date, CGC has declined N/A%, versus a 4.55% rise in the benchmark S&P 500 index during the same period.


This article is brought to you courtesy of MarketWatch.


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