OSC hits cannabis producer Cronos with penalties for failing to file accurate financial statements
The Ontario Securities Commission is imposing penalties on cannabis company Cronos Group Inc. and a former executive for failing to file accurate financial statements after the company completed two reviews.
The OSC said Cronos overstated its revenue by $7.6 million in the first three quarters of 2019, in part by booking sales on deals with other companies that failed to meet accounting rules. The company also overstated its assets by US$235 million in its second-quarter 2021 financial statements, the regulator said.
The OSC has reached settlement agreements with Cronos and former chief financial officer William Hilson. A hearing is scheduled for Monday at the Capital Markets Court, the jurisdictional branch of the regulator, to examine them. Until then, settlement details are not available.
In a statement emailed by his attorney, Cronos said he was unable to comment while details of the settlement remain confidential. Mr. Hilson did not respond to a message sent via LinkedIn. The OSC announced the allegations after 5 p.m. Toronto time.
Cronos currently has a market value of around $1.5 billion, but at the start of Canadian legalization, it was one of the most valuable cannabis companies in Canada. At the time of the erroneous sales, its market value was nearly $11 billion and its share price had tripled from a year earlier.
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The first accounting anomaly, in the first quarter of 2019, stemmed from an exchange of dried cannabis flower for cannabis resin with a third party in two simultaneous transactions, the OSC said. The deals added $2.5 million to revenue, or nearly 40% of the sales Cronos reported this quarter. “This transaction lacked commercial substance and therefore revenue should not have been recognized,” the OSC said.
During the three months ended September 30, 2019, there were three similar wholesale transactions involving the exchange of dried cannabis flower for cannabis extracts. The OSC also said these “lack commercial substance”. The transactions overstated revenue by approximately $2.1 million, or more than 15% of reported sales.
Mr. Hilson was Chief Financial Officer of Cronos until April 15, 2019, when he became Chief Commercial Officer for the remainder of the year. As Chief Commercial Officer, Mr. Hilson provided information on the terms of one of the third quarter agreements and negotiated another.
The OSC said he had signed an internal attestation that Cronos’ interim financial statements were accurate and fairly presented in all material respects with respect to his area of responsibility.
On February 24, 2020, Cronos announced that it had delayed the completion of its 2019 annual financial statements. A month later, Cronos said that its previously released unaudited interim financial statements for the first three quarters of 2019 would be restated. Cronos filed the restated interim financial statements on March 30, 2020.
Cronos made a second restatement in 2022, after concluding in February that it should have recorded a $234.9 million impairment charge on goodwill and intangible assets related to its U.S. reporting unit in 2021.
Companies are required to assess the value of intangible assets, such as brands and customer lists, and goodwill, an asset created during acquisitions. They should perform the analysis annually – or even more frequently if they have reason to believe the assets may have suffered impairment.
The company, the OSC said, failed to ensure that senior accounting executives “consistently engage in appropriate professional conduct and conduct consistent with the company’s code of business conduct and ethics.” Cronos also lacked accounting staff with the appropriate level of knowledge and experience of US Generally Accepted Accounting Principles (GAAP).
The OSC says Cronos’ failure to file interim financial statements prepared in accordance with applicable GAAP is a violation of Ontario securities laws. Both Cronos and Mr Hilson also “acted in a manner contrary to the public interest”, the regulator said.