ASC & CSA Disclosure Summary: Comments and Hot Buttons

We recently attended the ASC Connect Conference and thought our current and past client partners may be interested in what the hot button issues were.

In light of increasing regulatory scrutiny on company communications, which is relevant for public companies but also good for private companies to keep in mind we have prepared a summary outlining key highlights from the ASC conference as well as highlights from the recent CSA Staff Meeting Notice regarding the Cannabis Industry.

You’ll note there are comments that impact companies across various sectors, including governance issues, presentation of non-IFRS/non-GAAP financial measures, as well as highlights surrounding recent disclosures in the cannabis space.  If you have any questions or wish to receive the full slide deck from the ASC, or the full CSA Staff Meeting Notice, please don’t hesitate to contact one of us on the 5QIR team.

ASC Connect Conference highlights – OCTOBER 9, 2018

Got Pot?:

Continuous disclosure issues raised regarding Cannabis companies:

  • Overly promotional, particularly in press releases
  • Concerned with multiple press releases that don’t contain new material information
  • Disclosure regarding status of licensing process and articulating potential risk that a license is not granted
  • Do you have a business plan? Where are you in this plan?  (major milestones, timelines, expenditures)
  • Important to describe nature of US activities and indicate that under US Federal Law cannabis is still illegal
  • Need to disclose impact of financing options, relevant risks of not obtaining financing or licensing, etc.
  • Provide sufficient information in Financial Statements and MD&A to communicate financial performance, including accounting treatment of biological assets and fair value measurement processes

Board Gender Diversity:

Comply or explain disclosure on board renewal and gender – provide transparency on policies regarding board renewal process

  • Disclosure whether board term limits have been adopted. If the use of “other mechanisms” has been indicated, be clear on what those are.  Describe mechanisms for board renewal: Focus on the Reporting Issuer’s why and how, not just the what.
  • Gender Policy: a written policy for identification.  Disclosure of a general “Diversity” policy is NOT  What specific measures have been taken for recruiting / appointing female board members?
  • Gender diversity requirements applicable at both the board level and management level
  • Be specific on how the diversity policies will be implemented (or have been implemented)
  • Disclose both Number of female board numbers as well as Percentage (%) of the board that is female
    • The same disclosure should be provided for management

Non-GAAP Measures:

  • Ensure non-GAAP measures are not obscuring or overshadowing the GAAP measures e. caution against making non-GAAP measures more prominent
  • Ensure the reader is able to reconcile Non-GAAP back to GAAP
  • Correctly label relevant items as Non-GAAP
  • Be mindful of how many Non-GAAP measures are presented in the communication
  • Maintain consistency between the various reporting documents and between reporting periods (ie Quarters) for all Non-GAAP measures

Caution Around Promotional Disclosure:

  • Unsubstantiated / unsupported assertions about growth
  • Issuing press releases that do NOT contain any NEW material facts
  • Ensure there is sufficient disclosure and clarity regarding the company’s business plan as well as comprehensive risk disclosure in all public documents

CSA Staff Meeting Notice 51-357 (October 10, 2018) – Cannabis Industry focused

Levels of Information in Financial Statements

  • Found licensed cannabis producers (LPs) often did not provide sufficient information in their FS and MD&A for an investor to understand financial performance
  • IFRS requires issuers to record growing cannabis plants at their fair value. LPs need to improve their fair value and fair value related disclosures. For example, Profit & Loss including unrealized fair value gains related to the growth of biological assets which have not yet been sold.
    • Issuers should separately disclose:
      • Unrealized gains/losses resulting from fair value changes on growth of biological assets;
      • Realized fair value amounts included in the cost of inventory sold.
    • Issuers should clearly disclose:
      • What they consider to be the direct and indirect costs of production associated with biological assets,
      • Which P&L line item(s) these direct and indirect costs are recorded in, and
      • Whether the direct and indirect costs of biological assets are capitalized, or whether they are expensed as incurred.

US Activities & Forward-Looking Information

  • Complying with securities requirements for forward looking information
  • Issuers with cannabis operations in the US did not provide sufficient disclosure about the risks related to their US operations to satisfy the disclosure expectations

Fair value Measurement Process

  • LPs were not providing:
  • A description of the valuation techniques and processes,
  • A description of the inputs used in the fair value measurement including quantitative information about significant unobservable inputs,
  • The level of the fair value hierarchy within which the fair value measurement is categorized,
  • The sensitivity of the fair value measurement to changes in certain inputs, and
  • A discussion of any interrelationships between significant unobservable inputs and how they may affect fair value measurement.

Non-GAAP Measures:

  • LPs disclose a non-GAAP financial measure similar to ‘cash cost per gram’ to portray their cost of production, after excluding non-cash fair value adjustments.  While this measure is often calculated differently by individual LPs, the way in which it has been calculated should be understandable to investors. In many cases, the composition of a non-GAAP financial measure was unclear because it was difficult to understand what costs had been included in the GAAP measure that formed the starting point in calculating cash cost per gram.
  • Must provide sufficient explanation when reconciling items and disclose significant judgments made to quantify the reconciling item when explaining the calculation for Non-GAAP measures.

Production Estimates:

  • Issuers who make announcements about anticipated production capacity in a new facility under construction should disclose the material factors and assumptions inherent in that projection. Assumptions for financial projections should be specific and comprehensive, particularly with respect to quantitative details, such that an investor is able to clearly understand how each assumption contributes to the projection.

Misleading or Unbalanced Disclosure (Discuss Relevant Risks):

  • Issuers considering entering the cannabis industry, or issuers considering new investments in the cannabis industry, should ensure that announcements about these new opportunities are balanced, factual and not misleading to investors.