The two largest pot companies in the world have developed secret formulas that predict when the U.S. will legalize cannabis sales, or at least officially allow states to sell marijuana.
Aurora Cannabis Inc. ACB, +1.02% ACB, +1.55% and Canopy Growth Corp. CGC, +3.51% WEED, +3.79% included a reference to the secret calculations in their most recent financial statements. The accounting tricks are necessary because both companies “own” U.S. companies that they must put a value on, even though they cannot legally own the businesses yet.
Because cannabis sales are prohibited under U.S. federal law, the Toronto Stock Exchange last year asked all Canadian pot companies listed on its exchange to divest their U.S. weed assets or risk losing their listings. Major cannabis producers such as Aurora and Canopy figured out ways to have U.S. holdings, though, including purchasing warrants and other options in U.S. businesses and spinning off arm’s-length businesses that are able to invest in the U.S. because they are listed on junior exchanges, like Aurora’s Australis Capital Inc. AUSA, +0.00% AUSAF, +0.00% .
Determining the value of those holdings is quite complicated, though. That’s where a formula to determine when the cannabis companies will be able to recognize their investments in the U.S. market comes into play.
Aurora disclosed the use of the secret formula for the first time Wednesday in its disappointing fourth-quarter earnings report, when it revealed a new method of valuing warrants it holds to buy back a stake in one-time subsidiary Australis. Using the formula added almost C$10 million ($7.6 million) to Aurora’s bottom line.
Previously, Aurora valued the cash costs of its warrants in Australis, a venture capital-type unit, at half a million dollars. The change “adjusted for a probability factor of legalization of cannabis in the U.S. under federal and certain state laws” resulted in a C$9.6 million gain, which flowed through the income statement and bolstered the company’s net income. Aurora did not disclose the formula itself, only that it factored in the probability of legalization in the future.