Oops! Canopy Growth Misreported a Key Number -- Here's What You Need to Know

A mistake on a figure in Canopy Growth's third-quarter earnings release raises some concerns.

Keith Speights
Keith Speights
Feb 22, 2019 at 11:21AM
Health Care

You probably thought that all the numbers were in when Canopy Growth (NYSE:CGC) shared its fiscal 2019 third-quarter earnings results last week. As it turned out, that wasn't the case.

Canopy Growth announced on Thursday that it had filed an amended and restated Management Discussion and Analysis (MD&A) report for Q3. In the original MD&A report submitted on Feb. 15, Canopy stated that its adjusted EBITDA loss for the nine months ending was a little over 69 million in Canadian dollars (around US$52 million). But that number was incorrect. Instead, Canopy's actual adjusted EBITDA loss was much worse -- nearly CA$155.2 million (close to US$118 million).

How significant was this mistake? And what should investors make of it?

A man hits his forehead with his hand

Image source: Getty Images.

A blunder, but not a huge blunder

Canadian public companies must file two documents each quarter: a financial statement and an MD&A. Only the MD&A includes adjusted EBITDA because it's not a generally accepted accounting measure. Canopy Growth and many other companies provide adjusted EBITDA in their MD&A reports as a useful metric to help investors better assess operating performance. 

Canopy Growth said the incorrect adjusted EBITDA that was initially reported stemmed from "a formula error in the spreadsheet supporting the year-to-date adjusted EBITDA loss calculation." While a mistake in the year-to-date adjusted EBITDA might sound pretty bad, it really wasn't as horrible as it might seem.

Canopy Growth's management team didn't even mention the year-to-date adjusted EBITDA figure in the company's Q3 conference call. That's not unusual because the focus of the call was on the company's performance in the third quarter.

More importantly, all of Canopy Growth's Q3 numbers that were reported in its regulatory filing were correct. The company's revenue growth was as impressive as it initially looked. Canopy's Q3 adjusted EBITDA loss was exactly as the company originally stated. And Canopy still posted earnings of CA$74.9 million (US$56.3 million), or CA$0.22 per share (US$0.17 per share), primarily as a result of a fair change in value on its senior convertible notes.

A bigger issue?

While the mistake on the year-to-date adjusted EBITDA number wasn't too problematic, it does point to a potentially larger issue. Canopy Growth's accounting team didn't pay close attention to the details in a regulatory filing. That's concerning.

Although Canopy's year-to-date adjusted EBITDA wasn't a number that mattered very much, what if the spreadsheet formula error had impacted a more critical metric? It's easy to make errors in spreadsheet calculations. But it's also easy to identify such errors if there's enough attention to detail. 

Canopy Growth isn't a small mom-and-pop business. It's a company with a market cap of more than $15 billion. Its stock is listed on two of the world's largest stock exchanges. Millions of shares of Canopy Growth are traded every day.

Investors expect Canopy Growth to have its act together, especially when it comes to its financial reporting. But that doesn't appear to be the case right now. 

Check out the latest Canopy Growth earnings call transcript.

Making changes

The good news, however, is that Canopy Growth is making some changes -- and these changes were in motion before the company discovered the mistake in its Q3 update. Co-CEO Bruce Linton acknowledged in the company's Q3 conference call that Canopy's finance team isn't large enough and said that they're adding "more senior and competent finance team members."

Canopy Growth also announced last week that CFO Tim Saunders plans to retire later this year. The company is already searching for his replacement and expects to name a new CFO within a few months.

Many organizations experience growing pains as they expand. Canopy Growth is no exception. The company is likely to experience even more significant growth over the next few years as the global cannabis industry takes off, but perhaps Canopy's future growing pains won't involve embarrassing accounting errors.