Cannabis producer Cronos fined CA$1.3 million by Ontario securities regulator

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Canadian cannabis producer Cronos Group has been slapped with sanctions, including an administrative penalty of 1.3 million Canadian dollars ($960,000), for improperly recognizing CA$7.6 million in revenue in its 2019 interim financial statements.

Ontario’s Capital Markets Tribunal on Monday approved a settlement between the Ontario Securities Commission (OSC) and Cronos regarding the accounting errors.

The OSC found that Cronos improperly recognized the revenue in its first-, second- and third-quarter interim financial statements.

Cronos also overstated “virtually all” of its U.S. goodwill and a significant portion of its U.S. intangible assets by CA$234.9 million in the second quarter of 2021, the OSC said.

Those accounting errors resulted in the company restating interim financial statements for the three affected quarters.

In addition to the CA$1.3 million penalty, Cronos paid CA$40,000 to cover the cost of the OSC investigation.

Cronos will also have to pay for an “independent consultant,” acceptable to the OSC, to review its internal controls.

As part of the settlement, Cronos admitted it failed to file interim financial statements consistent with accepted accounting principles.

“As the industry continues to grow, it is imperative that investors receive accurate information about the financial performance of public cannabis companies to support informed investment decisions in this nascent sector,” Jeff Kehoe, director of enforcement at the OSC, said in a statement.

Kehoe said the settlements hold Cronos and William Hilson, former chief financial officer and chief commercial officer, “accountable.”

According to the OSC news release, while Hilson was Cronos’ CCO in 2019, he was involved in a wholesale transaction in which Cronos improperly recognized CA$3 million in revenue.

“In settling this matter, Hilson admits that he failed to take appropriate steps to address the handling of revenue recognition issues for this transaction by Cronos, and that his conduct was contrary to the public interest,” the OSC said.

The OSC said Hilson is subject to a one-year ban from acting as a director or officer of any public company, and he agreed to make a voluntary payment of CA$50,000 to the OSC and CA$20,000 towards the cost of the investigation.

“The settlement reflects that Hilson reached a timely resolution of the matter, which saved resources for both the OSC and the Capital Markets Tribunal,” the OSC said.

Also on Monday, the U.S. Securities and Exchange Commission charged the Toronto-based cannabis producer and its former chief commercial officer with accounting fraud for the same accounting incidents.

Of note, the SEC said Cronos and Hilson offered to settle the matter “without admitting or denying the SEC’s findings.”

According to the SEC, Cronos and Hilson agreed not to repeat the accounting errors.

Whereas Hilson faces only a one-year ban in Ontario, the SEC’s sanction on Hilson is a more severe three-year officer and director ban.

The OCS refused to explain the discrepancy to MJBizDaily.

Hilson will also be suspended from practicing before the SEC as an accountant for at least three years.

The SEC said it decided not to fine Hilson because he consented to pay CA$70,000 to the OSC.

In its own statement, Cronos said that, “as a result of the SEC settlement, the company will be unable to rely on the private offering exemptions provided by Regulations A and D under the Securities Act for a period of five years; lose its status as a well-known seasoned issuer for a period of three years; and be unable to rely on the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 for a period of three years.”

Matt Lamers can be reached at matt.lamers@mjbizdaily.com.