5 Memorable Financial Blunders in Cannabis in 2019

It's been a tough go for cannabis stocks and companies of late. And some don't see that improving in the near future.

While certain names may have been dragged down by the overall sentiment on the sector, there were also numerous instances where companies created their own problems.

Let's take a look five financial missteps in cannabis this year.

Canopy Growth

In February, Canopy Growth Corp. (CGC) (TSX: WEED) filed an amended report for its three and nine-month financials ending on December 31, 2018, and in doing so the company's losses doubled. The report wasn't issued until 11 p.m. in the prior evening.

In a company statement, Canopy said that the correction of the Adjusted EBITDA loss for the nine months jumped from C$69 million to C$155 million. "The correction was made due to a formula error in the spreadsheet supporting the year to date Adjusted EBITDA loss calculation. The Adjusted EBITDA loss for the three months ending December 31, 2018, was correct as reported, as were all prior quarters as released."

That was a C$86 million error and it was blamed on a formula problem in a spreadsheet. On a positive note, the net revenue for those nine months was C$132 million, but the net losses for that time period were a whopping C$349 million. The loss from operations for these nine months was C$402 million.

HEXO

In October, HEXO Corp. (HEXO) (TSX: HEXO) stock plunged almost 20% as the company told Wall Street that its revenues would be lower than expected. Step back to June and the company had said that it was on track to reach $400 million in net revenue in 2020 and that it would double net revenue in the fourth fiscal quarter.

The company said in a statement that it now expects net revenue for the fourth quarter to be approximately $14.5 million to $16.5 million and net revenue for the year to be approximately $46.5 million to $48.5 million.

This is a far cry from the company's previous claim. This follows the recent departure of the HEXO's Chief Financial Officer Michael Monahan. "Fourth-quarter revenue is below our expectation and guidance, primarily due to lower than expected product sell-through," commented Sebastien St-Louis, CEO and co-founder of HEXO Corp. "While we are disappointed with these results, we are making significant changes to our sales and operations strategy to drive future results.

Tilt Holdings

Tilt Holdings (TLLTF) (CNQ) was heavily criticized for taking a $500 million write-down after reporting its 2018 fiscal year results in May and a mere five months after going public. The seemingly benign statement read, "The net loss included a $496.4 million one-time, non-cash goodwill impairment taken at the end of fiscal 2018 related to the Company's reverse takeover of SVH."

The fallout from this simple statement was that the CEO and the company's Chairman both resigned. The company claimed the executives were mostly in their roles to bring the company public and since that had been accomplished were able to move on.

New shareholders were understandably upset when the company blamed the overvaluation on its investment banker and felt they had been duped. This was followed by a $20 million financing deal with the eye-popping 18.75% rate. That deal has since been retired and the company has made changes to its board.

DionyMed

On September 23, Flow Capital began legal proceedings against Dionymed DYMEF (CNQ) saying it was in default under the company's royalty agreement. The claim was for the minimum sum of $2,698,116 which is made up of the investment balance, past due royalty payments and late payment fees. The company's investment in DionyMed is $1,000,000 and there can be no assurance that the company will recover any portion of its investment.

That looked bad, but then on Oct. 17, DionyMed told the public that GLAS USA LLC and GLAS America LLC under the company's credit agreement dated January 16, 2019, provided the company with notice of default under the Credit Agreement and demand for immediate payment of the amount of $24,810,682.80 plus any additional interest, fees and expenses. GLAS America also concurrently provided the company with a Notice of Intention to Enforce Security under section 244 of the Bankruptcy and Insolvency Act (Canada).

DionyMed didn't have the money and has since gone into receivership.

PotNetwork

Penny stock cannabis company PotNetwork Holdings Inc. (POTN) reversed its recent decision to become a fully reporting SEC company on Sunday. On July 16, PotNetwork said it had filed Form 10 with the Securities and Exchange Commission (SEC) to become a fully reporting company. At that time the company stated, "These actions are fundamental to the Company's goal of heightened transparency for its investors and are expected to bring the Company greater visibility and credibility before global financial markets and investors. The Company also intends to uplist to the OTCQB."

Then PotNetwork asked the SEC to withdraw its Form 10 after the company learned that its auditing firm, East-West Accounting Services, LLC, Princeton, Florida, had lost its PCAOB certification as a result of a PCAOB disciplinary order specific to deficiencies in an audit conducted in 2015 for an unrelated Dallas, Texas company.

PotNetwork hired the accounting firm in August of 2017, even though earlier that year in February, the PCAOB issued a report regarding East West for its 2016 work. It wrote, "The auditor issued an opinion without satisfying its fundamental obligation to obtain reasonable assurance about whether the financial statements were free of material misstatement." Yet, the company hired them anyway.

At the time of publication, Borchardt had no positions in any securities mentioned.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider several names mentioned to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.