Cronos Group Faces SEC Inquiry Over Revenue Recognition Practices

SEC Inquiry Related to Bulk-Resin and Wholesale Sales, According to Documents Viewed by MarketWatch

Cronos Group Staff Allegedly Asked to Preserve Records Related to Deals with 4 Other Canadian Pot Stocks

Late Thursday evening, Max Cherney of MarketWatch reported that Cronos Group (TSX: CRON) (NASDAQ: CRON) (FRA: 7CI) is the subject of an SEC inquiry.

The MarketWatch report stated that the SEC’s Division of Enforcement has requested that Cronos retain all records related to how it recognized revenue for certain bulk-resin purchases and wholesale sales of biomass.

According to internal Cronos Group documents viewed by MarketWatch, on March 10, 2020, an email sent by the company’s lawyer instructed Cronos employees to retain certain records due to a “confidential and non-public inquiry by the Securities and Exchange Commission.”

The email allegedly instructed Cronos employees to obtain and preserve records dating back to July 1, 2018, that related to specific deals involving the following cannabis companies and their subsidiaries: MediPharm Labs (TSX: LABS) (OTCQX: MEDIF) (FRA: MLZ), 48North (TSXV: NRTH) (OTCPK: NCNNF), TerrAscend (CSE: TER) (OTCQX: TRSSF) and Heritage Cannabis (CSE: CANN) (OTCQX: HERTF) (FRA: 2UE).

The same email also directed Cronos staff not to openly discuss the inquiry.

Source: Shutterstock

One company that will undoubtedly be paying close attention to the Cronos inquiry is Altria Group (NYSE: MO) (FRA: PHM7). In late 2018, Altria paid CDN $2.4 billion for a 45% equity stake in Cronos. Altria’s investment in Cronos came with warrants, that if exercised, would increase the Marlboro maker’s ownership stake to 55%.

Cronos Group’s Audit Committee recently conducted its own review of certain bulk resin purchases and wholesale sales. The committee’s findings ultimately led to Tuesday’s announcement that “the company will reduce revenue for the three months ended March 31, 2019, by C$2.5 million and the three months ended September 30, 2019, by C$5.1 million.”

As of this writing, the SEC, Cronos Group, 48North and Heritage Cannabis have all declined to comment on the inquiry. Altria, MediPharm and TerrAscend did not respond to requests by MarketWatch for comment.

Read the original story by MarketWatch here.

CRON Price Action & Chart

Shares of Cronos Group’s TSX listed CRON stock closed trading on Thursday at $8.56 per share, up 4.8% on the day. The company’s NASDAQ listed stock closed the day $5.87, up 2.8%. In after-hours trading, U.S. shares of CRON dropped 2.9% to close the session at $5.70. It will be interesting to see how investors react to the news when markets open Friday morning.