The Ontario Securities Commission is placing sanctions on cannabis company Cronos Group Inc. and a former executive for failing to file accurate financial statements after the company twice made revisions.
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.
The OSC has entered into settlement agreements with Cronos and former chief financial officer William Hilson. A hearing is scheduled Monday at the Capital Markets Tribunal, the regulator’s adjudicative wing, to consider them. Until then, details of the settlements are unavailable.
In an e-mailed statement from its lawyer, Cronos said it was unable to comment while the settlement details 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 about $1.5-billion, but in the heady early days of Canadian legalization, 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.
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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 was Cronos’s 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 provided input on the terms of one of the third-quarter agreements and negotiated another.
The OSC said he signed an internal certification that Cronos’s interim financial statements were accurate and fairly presented in all material respects as they related to his area of responsibility.
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 (GAAP).
The OSC says Cronos’s failure to file interim financial statements prepared in accordance with applicable GAAP is a breach of Ontario securities law. Cronos and Mr. Hilson also both “acted in a manner contrary to the public interest,” the regulator said.
David Milstead
Greg McArthur