Ontario securities regulator hits cannabis producer Cronos for faulty financial statements

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Image of Toronto Stock Exchange building

The Toronto Stock Exchange building in downtown Toronto. (Photo by Matt Lamers)

Ontario’s securities regulator said it entered into settlement agreements with cannabis producer Cronos Group and one of its former top executives over allegations involving a breach of securities law and conduct contrary to the public interest.

The Capital Markets Tribunal will hold a hearing Oct. 24 to weigh approval of the settlement agreements. The details of those agreements are not public.

Cronos is accused of failing to file interim financial statements prepared in accordance with applicable generally accepted accounting principles (GAAP) and acting in a manner contrary to the public interest.

The Ontario Securities Commission (OSC) alleges William Hilson, who was Cronos’ chief financial officer and later chief commercial officer, acted in a manner contrary to the public interest.

“When public cannabis companies issue financial statements that do not provide accurate information about their financial performance and condition and fail to have adequate controls, they undermine confidence in Ontario’s capital markets and leadership in the cannabis space,” the OSC said in its statement of allegations.

A spokesperson for Cronos said the company is unable to comment as settlement details remain subject to confidentiality.

Hilson did not immediately respond to MJBizDaily queries for comment.

The OSC said Cronos is being held accountable for improperly recognizing 7.6 million Canadian dollars ($5.6 million) in revenue in 2019 “and for subsequently overstating virtually all of its U.S. goodwill and a significant portion of its U.S. intangible assets by a collective amount of $234.9 million (322.8 Canadian dollars) in its Q2 2021 interim financial statements.”

In February 2020, Toronto-headquartered Cronos announced a delay to its 2019 annual financial statements.

The following month, Cronos said the company’s audit committee was examining “the appropriateness” of the recognition of revenue from several bulk resin purchases and sales of products through the wholesale channel.

Weeks later, Cronos said unaudited interim financial statements for the first, second and third quarters of 2019 would be restated and revenue would be reduced for the quarters ended March 31, 2019, and Sept. 30, 2019.

In February 2022, Cronos filed more restated interim financial statements, this time for the quarter and half-year period ended June 30, 2021.

Cronos concluded that it should have recorded an impairment charge of $234.9 million on goodwill and intangible assets related to its U.S. reporting unit.

The first revenue recognition error in 2019 involved the exchange of cannabis dry flower for cannabis resin with a third party in the first quarter, according to the OSC.

This deal resulted in overstated revenue of approximately CA$2.5 million, the OCS said, adding that the transaction “lacked commercial substance” and the revenue should not have been recognized.

The transaction did not meet the criteria for revenue recognition in accordance with GAAP, according to the regulator.

Three similar transactions occurred in the quarter ended Sept. 30, 2019, with the same third party, all of which “did not meet the criteria for revenue recognition,” the OSC said.

The securities regulator did not name the third party.

The OSC said the errors resulted in Cronos overstating revenue by approximately CA$2.1 million for the three and nine months ended Sept. 30, 2019.

The OSC alleges that Hilson “played a significant role in a further wholesale transaction in which Cronos improperly recognized CA$3 million in revenue.”

Hilson served as CFO at Cronos from September 2016 until April 2019 and CCO from April 2019 to December 2019.

The OSC said Hilson signed off on the interim financial statements for the three months ending Sept. 30, 2019.

However, the wholesale “transaction did not, in fact, meet the criteria for revenue recognition in accordance with applicable generally accepted accounting principles.”

“Hilson failed to take appropriate steps to address the handling of revenue recognition issues” for the transaction, “including by not ensuring that an analysis of revenue recognition in respect of the transaction had been prepared and considered by the company prior to its completion of Q3 2019 Interim Financial Statements.”

The Statement of Allegations is available here.

Shares of Cronos are traded as CRON on the Toronto Stock Exchange and Nasdaq.

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