TORONTO — The Ontario Securities Commission (OSC) is asking the Capital Markets Tribunal to approve a settlement with an Ontario cannabis company and one of its former executives that the regulator alleges failed to file accurate financial statements.
The OSC did not outline the terms of the settlement in a filing made with the tribunal Thursday, but said Toronto-based Cronos Group Inc. improperly recognized $7.6 million in revenue in its first, second and third quarter financial statements filed in 2019.
The regulator also accused the company of overstating "virtually all" of its U.S. goodwill and a "significant" portion of its U.S. intangible assets by roughly US$234.9 million in its second quarter 2021 interim financial statements.
The OSC and Cronos both declined to discuss the matter further because the settlement terms remain confidential. Former executive William Hilson did not immediately respond to a request for comment, but he and his past employer could face sanctions if the tribunal approves the settlement on Monday.
The OSC said some of the revenue errors were caused by dry flower transactions accounted for as revenue that "lacked commercial substance" and another transaction that did not meet the criteria for revenue recognition because "it was deemed to be a consignment sale."
Cronos corrected the errors but reported related "material weaknesses in internal control over financial reporting." The errors constitute a breach of Ontario's securities law and are contrary to public interest, the OSC said.
The OSC placed some of the blame on former chief financial officer and chief commercial officer William Hilson, who it alleged didn't take appropriate steps to address these issues.
"In Hilson’s role and as a Chartered Professional Accountant, he understood the need for the transaction to be properly accounted for by Cronos in its interim financial statements," the OSC said in its filing.
"He failed to take appropriate steps to address the handling of revenue recognition issues for this transaction by Cronos."
Hilson, the OSC charged, signed an internal certification claiming the interim financial statements were "accurate and fairly presented in all material respects Cronos’ financial condition, results of operations, and cash flows as they related to his area of responsibility."
Hilson did not meet the criteria for revenue recognition laid out in standard accounting principles known as International Financial Reporting Standards (IFRS).
The OSC's actions against Cronos come as it has been taking a close look at cannabis companies and their financial practices in recent months.
The regulator headed to an Ontario court this week to pursue a case against three former CannTrust Holdings Inc. leaders facing charges related to thousands of kilograms of cannabis found growing in unlicensed rooms operated by the company. The men pleaded not guilty on Monday.
This report by The Canadian Press was first published Oct. 21, 2022.
Tara Deschamps, The Canadian Press
