Dive Brief:

• The Securities and Exchange Commission (SEC) charged Cronos Group, a Nasdaq-listed cannabis producer, for fraudulently accounting for millions of dollars of revenue and other accounting misconduct, the agency said.
• The agency also charged former Cronos Chief Commercial Officer William Hilson with fraud and aiding the violations by the Toronto-based company. Cronos and Hilson neither admitted nor denied the findings, the SEC said.
• “It is critically important for issuers to have adequate controls in place before they take on the reporting obligations required of public companies,” Mark Cave, associate director of the SEC’s Enforcement Division, said Monday in a statement. “Cronos avoided penalties by promptly self-reporting its accounting misconduct as it came to light within the company, cooperating with our investigation and promptly taking effective remedial steps.”

Dive Insight:

During three quarters in 2019 and 2020, Cronos filed financial statements with the SEC that included flaws in revenue recognition, goodwill impairment and other accounting errors, the agency said.

Hilson during one quarter made an undisclosed oral agreement to sell cannabis flower and repurchase cannabis products during the following quarter. The agreement was neither known nor accounted for by Cronos, which discovered the $2.3 million accounting mistake during an internal investigation.

“Cronos promptly reported the misconduct to the SEC and provided extensive cooperation that meaningfully advanced the commission’s investigation,” the SEC said. “It also took effective remedial steps to enhance its internal accounting controls.”

The SEC determined that Cronos broke the antifraud, reporting, books and records and internal controls provisions of federal securities laws. The agency also found that Hilson “aided, abetted and caused Cronos’s violations,” the SEC said.

Cronos previously filed restatements for the first three quarters of 2019 and the second quarter of 2021.

Cronos shares have fallen 25% this year. The company sells several products under brand names such as Peace+, Spinach and Happy Dance.

Cronos in a settlement agreed to pay a $984,000 penalty to the Ontario Securities Commission (OSC) and to hire an independent compliance consultant to make recommendations regarding its financial reporting and accounting controls, Cronos said in a press release.

Hilson agreed to a three-year officer and director bar and to suspension from practicing before the SEC as an accountant for the same period, the SEC said. It did not fine Hilson in light of his agreement to pay the OSC a $54,000 penalty.

“We are pleased to have resolved these matters,” Cronos CEO Mike Gorenstein said in a statement. “Important steps have been taken to strengthen our internal controls and we are committed to continuing this work.”