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Cannabis Watch

March 22, 2020, 10:22 a.m. EDT

Exclusive: Pot company Cronos receives SEC inquiry

The SEC’s Enforcement Division has asked Cronos to preserve records related to the bulk purchase of resin and wholesale sales, according to internal communications, as company investigates revenue-recognition practices

By Max A. Cherney


Cronos Group
Cronos Group disclosed an internal investigation into its revenue-recognition practices this month.

The Securities and Exchange Commission has sent an inquiry to Cronos Group Inc., one of the largest cannabis producers in Canada, requesting the company retain records related to how it recognizes certain revenue, according to internal Cronos communications reviewed by MarketWatch.

In an email sent to employees from a company lawyer on March 10, Cronos (NAS:CRON)   (TSE:CA:CRON)  instructed staff to retain certain records pertaining to a “confidential and non-public inquiry by the Securities and Exchange Commission.” The SEC Division of Enforcement has requested that the company retain and preserve all records about revenue recognition related to bulk-resin purchases and wholesale sales of biomass or other products, according to the email and an attached document. Bulk resin is a type of cannabis concentrate, and biomass is marijuana from which companies typically extract oil for vape products or edibles.

Cronos and the SEC declined to comment.

Cronos — a Canadian licensed pot producer backed by a $1.8 billion investment from tobacco company Altria Group Inc. (NYS:MO)   — said in an SEC filing on March 2 that it was conducting an internal review into its accounting practices surrounding purchases of marijuana extracts and wholesale revenue. Cronos disclosed Tuesday that as a result of its review it would have to reissue three quarters of financial statements for 2019, and will report C$2.5 million in reduced revenue for the first quarter and C$5.1 million for the third quarter. The company also disclosed that it would likely report “one or more” material weaknesses in its internal controls related to financial reporting.

See also: Cronos paid $300 million for a small CBD company, and CEO’s private-equity firm stands to collect $120 million of it

Cronos instructed staff not to discuss the inquiry and to take immediate steps to preserve records dating back to July 1, 2018, the document says. The document instructs Cronos employees to preserve records related to specific transactions, negotiations and other dealings with MediPharm Labs Corp. (TSE:CA:LABS) , a Canadian extraction business; TerrAscend Corp. (CNQ:CA:TER) , which operates dispensaries in California and elsewhere; and Canadian licensed producers Heritage Cannabis Holdings Corp. (CNQ:CA:CANN)  and 48North Cannabis Corp. (TSX:CA:NRTH) , along with subsidiaries of the companies.

48North, Heritage Cannabis and MediPharm declined to comment. TerrAscend did not respond to a request for comment.

Altria paid $1.8 billion to acquire a 45% stake in Cronos in December 2018, along with warrants that, if exercised, would raise that stake to 55%. The deal gave the maker of Marlboro and other tobacco brands an exclusive partnership in the cannabis sector just months after Canada fully legalized weed. Altria did not respond to a request for comment.

Cronos stock has slid 73% in the past year, as the S&P 500 index (S&P:SPX)  fell 14.2%.

Link to MarketWatch's Slice.