Canadian regulator wants cannabis companies to disclose US border risk

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Canada’s securities watchdog is warning the country’s publicly traded marijuana companies to improve their disclosure practices – including any risks tied to their executives and employees crossing into the United States – or face additional regulatory action.

The warning came in a detailed notice published Oct. 10 by the Canadian Securities Administrators (CSA), an umbrella organization for provincial securities regulators.

The CSA said in the notice that its review of 70 cannabis industry companies found that many had inadequate, inconsistent or misleading disclosures to shareholders.

Issues were found for all licensed producers that were reviewed.

Three-quarters of the companies with U.S. marijuana-related activities took action to improve their disclosure, with 17% refiling their most recent management’s discussion and analysis to correct “more pervasive deficiencies,” the report found.

“Licensed cannabis producers often did not provide sufficient information in their financial statements and management’s discussion and analysis for an investor to understand their financial performance,” according to the report.

The warning comes as cannabis stocks display exuberance not seen in the market since the dot-com fervor almost 20 years ago.

The Canadian Marijuana Index, a basket of the leading cannabis stocks operating in Canada, is up more than 200% over the past year, fueled by the country’s imminent launch of its recreational MJ market.

Companies such as Tilray – which reported quarterly revenue under $10 million and assets worth only $38 million – have sported valuations in excess of American Airlines’ in that time.

Border risks

The regulator also wants Canadian cannabis companies to address risks associated with how their involvement in the legal cannabis industry may affect whether company officials are admitted into the United States.

A U.S. Customs and Border Protection (CBP) official told Marijuana Business Daily in August that admissibility may be denied merely by “working or having involvement in the legal marijuana industry in U.S. states where it is deemed legal or in Canada” as cannabis remains federally prohibited.

The CBP clarified this week that Canadian citizens working in that nation’s legal marijuana industry and coming to the United States for reasons unrelated to the marijuana industry “will generally be admissible to the U.S.”

However, the CBP said if a traveler is found to be entering the United States for reasons related to the cannabis industry, they may be deemed inadmissible.

That may have an impact on the publicly traded companies in Canada involved in the U.S. marijuana industry.

Inadmissibility in the U.S. implies a lifetime ban because it won’t be lifted unless one applies for and obtains a waiver.

So far, only a small number of Canadians have reported being impacted.

‘Funded’ capacity

The CSA took aim at companies “who make announcements about anticipated production capacity in new facilities under construction” – a reference to the “funded capacity” metric that is commonly misused in the cannabis industry.

The regulator wants companies to disclose “specific and comprehensive” factors and assumptions related to those projections.

Companies are also required by law to update investors on any changes in those projections or forward-looking information.

Costs per gram

The organization also warned that all licensed producers reviewed needed to improve their “fair value” and fair value-related disclosures to stockholders and additional disclosures involving another of the most common metrics in the industry – cost per gram.

“Several issuers did not sufficiently explain significant judgments used in determining what represents a gram for the purposes of calculating cash cost per gram. In some cases, a gram represented a gram sold and in other cases it represented a gram harvested,” according to the notice.

Michael Miller, director of finance at White Sheep Corp., a commercial operator and strategic investor in cannabis assets, said companies need to be more transparent.

“There’s a cake, and you’re not always disclosing how it’s made,” he said. “(The CSA) said the biggest problem is (LPs) are all using different definitions – including certain costs, excluding certain costs. Some are basing it on the harvest cost; some are basing it on costs including shipping and packaging.

“They said if LPs want to report cost-per-gram, they have to make it very clear that this is a non-IFRS (International Financial Reporting Standards) and non-GAAP standard, and you should tell investors exactly what’s going into your equations.”

Miller has been outspoken about how the “fair value” of cannabis crops is reflected in financial statements and the level of discretion that management has in dictating the fair value.

Miller said the CSA notice boils down to investors needing help with readability, comparability and disclosures when it comes to cannabis companies’ financial reports.

“They need a better understanding of the risks,” he said. “They need to more meaningfully compare companies, and they need to be able to form more meaningful comparisons between companies.”

Matt Lamers can be reached at

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