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Why Hazy Accounting Caused This Marijuana Stock To Tumble Today

By Todd Campbell - Jan 11, 2016 at 4:05PM

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A lack of confidence in its financial process is leading investors to head for the exits.

Source: GW Pharmaceuticals plc

What: After a story appeared in The Sunday Times regarding the company's admission in filings to lacking accounting controls, shares in GW Pharmaceuticals plc (GWPH) slumped by 10% earlier this morning before recovering to a loss of 7.15% at 3 p.m. EST.

So what: Last week, the company disclosed that it had a material weakness in its accounting practices for the year ending Sept. 30.

The disclosure was made to comply with stricter disclosure policies in the U.S. and the admission highlights a material weakness in controls related to the accounting of clinical trial costs and milestone liabilities.

Now what: It's never a good sign when a company begins questioning its own internal financial controls and the revelation is the latest in a string of stumbles at the company last year.

Previously, GW Pharmaceuticals had disclosed the failure of three phase 3 trials of its THC drug Sativex for cancer pain and a disappointing mid stage trial readout for the treatment of schizophrenia.

GW Pharmaceuticals indicated that it doesn't expect to have to restate financials because of the material weakness, but it does admit that it is a possibility.

Given the company is spending millions of dollars on trials to evaluate the potential of marijuana medicine, including expenses related to late stage trials in epilepsy that will have data available soon, this company has its hands full. Until we know for certain that its financials are ship-shape, this stock is too risky for me to be a buyer -- especially ahead of the upcoming epilepsy results. Therefore, the sidelines are probably a good place to be in this one until there's more clarity. 

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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