According to Canadian regulators, marijuana companies are failing to provide even the most basic financial information to shareholders, including most everything from production cost to fair value assessments.
The Canadian Securities Administrators concluded in a statement made Wednesday that every one of the 70 companies they reviewed failed to meet the disclosure requirements. They often failed to provide enough information for an investor to get a scope of their financial performance.
The CSA, an umbrella group for provincial regulators, said: “The cannabis industry has benefited from increasingly permissive legal frameworks and has grown significantly as an emerging public-market sector. Our review identified industry-specific disclosure deficiencies, which are notable given the recent rapid growth of this industry.”
Among those with operations in the United States, 74% failed to provide sufficient information about the risks of operating where marijuana is still illegal federally. Every licensed producer reviewed needed to make improvements to their fair value-related disclosures.
On the bright side, the CSA said that all issuers took immediate action to improve their reporting when the deficiencies were revealed.
There are currently more than 135 publicly traded marijuana companies operating in Canada. These companies have a combined market value that’s higher than C$60 billion ($46 billion). The reporting standards required in Canada, the International Financial Reporting Standards, favor the model used by the agricultural industry. This fair-value model requires companies to assign a value to their cannabis plants while they’re still being grown.
In their review, the CSA determined that about 71% of these producers hadn’t separately disclosed all of their fair value amounts, making it hard for investors to determine the company’s sales costs.
“It is critical for investors to be able to understand how much it costs a company to produce its product,” regulators said.
According to the CSA, the processes and assumptions used by the marijuana companies to determine the fair value of their plants were found to be “subjective and involve significant judgments.” Every producer was found to have failed in adequately disclosing all assumptions made in determining their fair-value numbers.
The same was found to be true for production costs. Some financial reports stated that the cost per gram referred to a gram that was sold, while others said it referred to a gram that was harvested. Many companies also failed to provide the information of the total grams of dried cannabis they needed to produce their cannabis oils.
The CSA will continue to monitor these companies’ financial reporting. Those issuers found to still not be providing adequate information may be subject to regulatory action.