Pot Companies Failing at Financial Reporting, Regulator Says

(Bloomberg) -- Cannabis companies are failing to adequately disclose even basic financial information to shareholders -- from cost of production to fair value assessments, according to Canadian regulators.

Of 70 companies reviewed, every single one fell short on disclosure requirements, often not providing enough information in their statements and management discussion for an investor to understand their financial performance, the Canadian Securities Administrators said in a statement Wednesday.

“The cannabis industry has benefited from increasingly permissive legal frameworks and has grown significantly as an emerging public-market sector,” said the CSA, an umbrella group for provincial regulators. “Our review identified industry-specific disclosure deficiencies, which are notable given the recent rapid growth of this industry.”

The CSA warning comes years after pot companies began listing on the country’s exchanges and just days before Canada legalizes marijuana for recreational use on Oct. 17. Valuations of many pot companies have soared, though the stocks are often volatile.

Among issuers with operations in the U.S., 74 percent didn’t provide sufficient disclosure about the risks of operating in the country, where marijuana is illegal at the federal level, the CSA said. All of the licensed producers reviewed were found to need improvements to their fair value-related disclosures.

When deficient disclosure was found, all issuers took action to improve their reporting, the CSA said.

There are now more than 135 publicly traded cannabis companies in Canada, with a combined market value of more than C$60 billion ($46 billion). The International Financial Reporting Standards used in Canada favor the fair-value model used by the agricultural industry, which requires companies to place a value on their marijuana plants while they’re still in the ground.

The CSA found that 71 percent of licensed producers didn’t separately disclose all fair value amounts, making it difficult for investors to understand a company’s cost of sales.

“It is critical for investors to be able to understand how much it costs a company to produce its product,” the regulator said.

In addition, the processes and assumptions used by companies to determine the fair value of their plants “are subjective and involve significant judgments,” according to the CSA. All of the producers reviewed failed to adequately disclose the assumptions they made in arriving at their reported fair-value numbers.

The same was true for disclosure of cash cost per gram, or a company’s cost of production. In some financial reports, a gram represented a gram sold, while in others it represented a gram harvested. Other companies failed to disclose how many grams of dried cannabis were used in the production of cannabis oils.

The CSA said it would continue to monitor reporting from cannabis companies. Issuers who don’t provide appropriate disclosure may be subject to additional regulatory action.

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