Cannabis company Cronos Group Inc. CRON-T has paid $1.34-million to settle Ontario Securities Commission accusations that the company failed to file accurate financial statements.
Former Cronos executive William Hilson, also a defendant in the matter, paid $70,000 and agreed not to serve as a director or officer of a Canadian public company for the next year.
The Capital Markets Tribunal, the regulator’s adjudicative wing, approved the settlements late Monday. Chair Tim Moseley said Cronos identified the problems itself, reported them to the OSC and co-operated with the investigation.
Cronos and Mr. Hilson also entered into a settlement Monday with the U.S. Securities and Exchange Commission over the allegations. Cronos, which also trades on U.S. exchanges, and Mr. Hilson were not required to pay anything to the SEC, given the Ontario settlement and their co-operation, the SEC said. Mr. Hilson agreed not to serve as a director or officer or appear before the SEC as an accountant for the next three years.
As part of the settlements, Cronos and Mr. Hilson neither admitted nor denied the findings of the SEC.
In its allegations, the OSC said Cronos overstated its revenue figures by $7.6-million in the first three quarters of 2019, in part by booking sales on transactions 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.
Cronos has a market value of about $1.5-billion, but in the heady early days of Canada’s legalization of recreational marijuana, it was one of the most valuable cannabis companies in Canada. At the time of the misstated sales, its market value was nearly $11-billion, and its share price had tripled over the previous year.
The first accounting misstatement, in the first quarter of 2019, stemmed from an exchange of cannabis dry flower for cannabis resin with a third party in two simultaneous transactions, the OSC said. The deals added $2.5-million to revenue, nearly 40 per cent of the sales Cronos reported that quarter. “This transaction lacked commercial substance and therefore revenue should not have been recognized,” the OSC said.
During the three months ended Sept. 30, 2019, there were three similar wholesale transactions involving the exchange of cannabis dry flower for cannabis extracts. The OSC said these, too, “lacked commercial substance.” The transactions overstated revenue by about $2.1-million, or more than 15 per cent of reported sales.
Mr. Hilson, a chartered professional accountant, was Cronos’ chief financial officer until April 15, 2019, when he became chief commercial officer for the remainder of the year. As chief commercial officer, Mr. Hilson negotiated one of the third-quarter transactions, the OSC said.
The OSC said he signed an internal certification that Cronos’ interim financial statements were accurate and fairly presented in all material respects as they related to his area of responsibility. The OSC said he failed to take steps to ensure the transaction would be accounted for appropriately.
The OSC said $40,000 of Cronos’ payment and $20,000 of Mr. Hilson’s payment were designed to reimburse the regulator for the costs of the investigation, while the rest of the payments – already collected by the OSC – were penalties. The company must also pay for an independent compliance consultant to advise on its financial systems, including its controls over financial reporting.
Andrea Laing of Blake, Cassels & Graydon LLP, who served as Cronos’ outside counsel in the matter, said Cronos has since expanded its finance and accounting team, improved its internal controls, and created an internal audit function.
“This is a very important opportunity to bring closure to the process and an opportunity for Cronos to move forward as an organization,” Ms. Laing said.
Melissa MacKewn of Crawley MacKewn Brush LLP, Mr. Hilson’s lawyer, thanked the OSC for pointing out that Mr. Hilson’s role was limited and that others at the company had the responsibility for the accounting treatment of the transactions.
On Feb. 24, 2020, Cronos announced that it was delayed in completing its 2019 annual financial statements. A month later, Cronos said its previously issued 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 an impairment charge of US$234.9-million 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 when they make acquisitions. They must do the analysis annually – or even more frequently if they have reason to believe the assets may be impaired.
The company, the OSC said, did not ensure that senior accounting personnel “engaged consistently in appropriate professional conduct and conduct consistent with the company’s code of business conduct and ethics.” Cronos also lacked accounting personnel with the appropriate level of knowledge and experience in the U.S.’s generally accepted accounting principles.
Editor’s note: An earlier version of this article said that Cronos and Mr. Hilson neither admitted nor denied the findings of the OSC. The company and Mr. Hilson made some factual admissions in the OSC matter.