One year ago, it looked as if the cannabis industry would not be stopped. Canada has just become the first industrialized country in the modern era to legalize recreational marijuana, derivative products were expected to be launched by no later than October 2019, and a number of states in the U.S. were newly legalizing marijuana at some capacity.
Regulatory and procedural problems in Canada have combined to keep legal products from reaching dispensaries. Health Canada has been overwhelmed with cultivation’s and sales license applications, while certain provinces (Ontario) have been slow to license physical dispensaries. Meanwhile high tax rates in U.S. markets have encouraged consumers to stick with considerably cheaper black-market growers.
Canadian Pit stocks are (legally) fooling you
It’s easy for investors to read a headline number (such as sales, or earnings per share) And take it as fact. But Canadian cannabis stocks are a different breed of company that require more sleuthing from investors to uncover the facts. That’s because publicly traded Canadian cannabis companies report their operating results using International Financial Reporting Standards (IFRS), which. Has a few market differences from the generally accepted accounting principles (GAAP) that we’re used to in the United States.
Canadian cannabis stocks are classified Ava ”agricultural companies” under IFRS accounting, as such are required to make a handful of estimayltions and reconciliations on their income statements, some which can alter their operating results.
These two “profits” aren’t really profits
The thing to understand here is that these fair-value adjustments have no bearing on the operational performance of Canadian cannabis stocks. All they wind up doing is confusing investors, especially if the fair-value adjustment results in a considerable upward adjustments gross profit, which has happened twice over the past month.
For an example, on Tuesday, November 12, medical-clinic operator and marijuana grower Alesia Health (OTC:ALEAF) reported its third-quarter operating results. This was a particularly anticipated event, giving that Aleafia provided guidance on Sept. 24 that would be achieving positive net income for the quarter. But all is not as it appears.
The thing is, Aphria realized a negative Ca$7.3million adjustment on product sold from inventory, but was graced with a positive CA$25.2million bump from fair value on its biological assets. In short, that CA$27.6million gross margin jumped to CA$45.4million with a click of an account’s pen. But in Q1 2020, Aphria’s CA$27.6 million in gross margin me before fair-value adjustments would have paled in comparison to its CA$41.4 million in normal operating expenses. Just like Aleafia Health, it would not have made money without this perfectly legal, but confusing adjustment.