After settling securities violations with Canadian regulators, Cronos Group was hit again on Monday when the U.S. Securities and Exchange Commission charged the Toronto-based cannabis producer and its former chief commercial officer with accounting fraud.
Cronos and the former executive, William Hilson, offered to settle the matter – without admitting or denying guilt – by agreeing to cease and desist from future violations of the charged provisions, according to an SEC news release.
The agency said the company and Hilson had failed to properly account for millions of dollars of revenue and committed “other accounting misconduct in multiple reporting periods.”
In agreeing to settle with Cronos, the SEC said the company wouldn’t need to pay a financial penalty “given its timely self-reporting, significant cooperation, and remediation.”
Going forward, Cronos has agreed to retain an independent compliance consultant to review its financial reporting and accounting controls.
Hilson agreed to a three-year ban from serving as an officer or director of any U.S. publicly traded company. He also agreed to be suspended from appearing and practicing before the SEC as an accountant for at least three years.
The SEC said Hilson also agreed to pay $54,000 to Ontario securities regulators.
As MJBizDaily reported on Friday, Cronos and Hilson ran afoul of the Ontario Securities Commission for improperly reporting revenue the company did not earn and also “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,” as the agency alleged.
Cronos’ up and down
“We are pleased to have resolved these matters,” Cronos CEO Mike Gorenstein said in a news release Monday.
“Important steps have been taken to strengthen our internal controls, and we are committed to continuing this work.”
Once a high-flyer like other Canadian cannabis companies that enjoyed an initial bull period after federal legalization in 2018, Cronos catapulted to prominence in 2019 after tobacco giant Altria invested $1.8 billion in the company.
It was seen at the time as a strong endorsement of the cannabis industry’s rosy future.
The company listed on the Nasdaq in 2019. However, the same trouble plaguing other one-time unicorns also visited Cronos. The company lost 75 percent of its 2019 value by 2021.
During that time, Cronos refiled earnings reports in 2020 and again in 2022 after reviewing “the appropriateness” of revenue claimed after a transaction with an unidentified third party.
‘Motivated to increase revenue’
According to the SEC, the company was “motivated to increase its revenue … in order to close the gap with internal revenue targets,” but it was Hilson alone who signed off on the sale of otherwise “unsaleable” cannabis biomass to an unnamed third party, called only “Company A,” with the agreement to buy the product back later.
After buying CBD company Lord Jones in the summer of 2019, the SEC said the company also failed to update the reported value of that brand’s intangible assets and goodwill despite underperforming and showing “an approximate 60% decrease in projected revenues in future years.”
In revised financial statements filed in February 2022, Cronos reduced the value of Lord Jones’ brand name and goodwill by $178.4 million, according to the SEC, which pinned the blame on unskilled company accountants unfamiliar with accounting practices.
“All of this highlights how it’s critical to have robust internal financial controls, and be surrounded by seasoned back office and outside professionals, if you’re going to be a public company (and there are a lot of public cannabis companies),” said Marc Hauser, president of California-based Hauser Advisory, an industry consulting firm.
Cronos is only the latest cannabis company “nailed for securities violations,” observed Neil Kaufman, a New York-based corporate and securities attorney.
Kaufman called Hilson’s actions “totally predictable” given the increasingly bearish market and the pressure to perform, particularly after Cronos went public in the United States and received the Altria investment.
“This just reinforces the narrative that cannabis companies can’t be trusted,” Kaufman added, “and that’s what concerns me.”
Chris Roberts can be reached at chris.roberts@mjbizdaily.com.
