The cannabis market has felt the brunt of litigation. Many companies have been apart of legal issues from former executives fighting wrongful termination, product quality in recall actions, and shareholders claims against executives, directors, and officers about misappropriated capital and funds. Most of the claims filed against Cannabis Companies will take years to determine at who’s truly at fault and who get a payout.
How Can This Impact Investors?
Long-Term investors must be aware of the current and future lawsuits of the companies that they hold.
These litigations can impact share prices and impact financial statements. Most companies report their financial statements under the International Financial Report Standards (IFRS). IFRS has created rules and guidelines to determine if a company is required to record an event, list in the footnotes, or given no mention. If the company is required to pay damages this could make a huge impact on the company’s bottom line. Companies that are obligated to record punitive damages sway net income and earnings per share.
For cannabis companies that have managed to secure debt financing, this may also compromise the financial reserves they are required to maintain to remain in good standing with their lenders.
Given the potential financial consequences of recording these events on the books, IFRS has tests meant to ensure that companies are not required to book arbitrary provisions which could make an otherwise profitable company appear as a debt-laden economic disaster. Companies such as Medmen (MMNFF) and Canopy Growth (CGC) has stated IFRS standards to avoid booking provisions from lawsuits in their filings.
Even information that is only required to be listed in the footnotes can eventually make it to the financial statement as more information is uncovered.
What About Investors?
Although managers may have a strong incentive to downplay the impact of potential outflows due to legal actions, it is ultimately up to investors to examine these risks and incorporate this information into their trading and investing decisions.