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Cronos Group Inc. has been hit with a class action lawsuit accusing the cannabis company of inflating its reported revenue figures to boost its appeal to shareholders.
Cronos cultivates, manufactures and markets cannabis products for medical and recreational use and its revenue is generated through the sale of dried cannabis and cannabis oils.
In addition to Cronos, a number of directors and officers of Cronos who were involved in the company’s business operations and financial reporting are also named as defendants.
Class Action: Cronos Improperly Recorded Transactions to Boost Revenue
According to the Cronos scheme class action lawsuit, public issuers have been under increasing pressure in the last two years to deliver strong financial results to demonstrate sustainable growth after Canada legalized recreational cannabis.
In the first three quarters of 2019, Cronos reportedly posted increasing revenue, suggesting that the company had a strong future in Canada’s cannabis market.
“Unknown to shareholders, however, Cronos had orchestrated a scheme to inflate its reported revenue figures,” plaintiff Badesha Harpreet alleges in the Cronos scheme class action lawsuit.
“To do so, Cronos entered into simultaneous transactions with third parties to both sell them cannabis dry flower and to purchase back cannabis resin and tincture, transactions that were concluded in contemplation of one another.”
Cronos allegedly recorded these sales as revenue instead of properly accounting for the transactions at the carrying value of inventory transferred by Cronos, Badesha claims. This scheme allegedly allowed Cronos to inflate its balance sheet and suggest to shareholders that Cronos was growing.
According to the Cronos inflated revenue class action lawsuit, these improper transactions represented more than 35% of Cronos’ reported revenue for the first and third quarters of 2019.
Cronos Required to Provide Regular Disclosure Documents
The Cronos scheme class action lawsuit says the cannabis company was subject to continuous disclosure obligations to prepare and file on SEDAR regular disclosure documents about its business and financial positions.
These include interim financial statements, annual and interim MD&As to describe how the company performed during the period covered by the financial statements, and an AIF, which describes any risks and other factors that may impact the company.
These disclosure obligations prohibited Cronos from making statements that were false or misleading, and which would reasonably be expected to have a significant effect on the company’s market price.
Further, each of the named defendants knew that they had responsibility for ensuring the accuracy and completeness of the disclosure documents, the Cronos inflated revenue class action lawsuit says. However, they allegedly allowed the misrepresentations about the company’s revenue to be presented in financial disclosures, press releases, and other communications about the company’s financial situation.
A whistleblower reportedly raised concerns about the Cronos inflated revenue internally, and in February and March 2020, Cronos informed the public about its impropriety through a series of disclosures.
On Feb. 24, Cronos issued a press release announcing that it would delay the release of its Q4 2019 and full-year earnings release. On March 17, another Cronos press release announced that its interim financial statements for the first three quarters of 2019 would be reissued and should no longer be relied upon.
Marketwatch published an article on March 19 stating that Cronos was under investigation by the U.S. Securities and Exchange Commission. On March 30, Cronos reportedly released the restated financial statements which indicated the company had inflated its revenue.
In response to the news of its revenue inflation, the price of Cronos shares plummeted. Badesha filed the Cronos scheme class action lawsuit as an attempt to recover those losses from Cronos and those responsible for the scheme to inflate the company’s revenue.
Class Members Overpaid For Cronos Shares, Plaintiff Says
Badesha reportedly purchased 885 shares on the TSX during the Class Period and continued to own the shares at the time Cronos acknowledged that it had inflated its reported revenue. Cronos shares were publicly listed under the trading symbol “CRON” on the TSX, Nasdaq Global Market, and other trading venues.
Class Members of the proposed Cronos inflated revenue class action lawsuit includes anyone who, from 7:00 a.m. ET on Aug. 14, 2018 through 4:33 p.m. ET on March 30, 2020, acquired Cronos’s shares in the secondary market, excluding Cronos and its subsidiaries, affiliates, and other excluded persons.
Badesha says that Class Members have suffered damages in the amount of the inflated prices of the Cronos shares they purchased during the Class Period, and that the price inflation was related to misrepresentations by Cronos and the other defendants.
“The Defendants’ conduct was high-handed, outrageous, reckless, wanton, entirely without care, deliberate, callous, motivated by economic considerations, and amounted to an abuse of the capital markets,” the Cronos scheme class action lawsuit states. “Such conduct renders the Defendants liable to pay punitive damages.”
Cronos is currently facing legal trouble for allegedly misrepresenting the potency of some of its cannabis products as well.
What do you think about the Cronos inflated revenue class action lawsuit? Tell us your thoughts in the comment section below!
Class Members are represented by Serge Kalloghlian, Garth Myers and Paul Bates of Kalloghlian Myers LLP and A. Dimitri Lascaris of A Dimitri Lascaris Law Professional Corporation.
The Cronos Inflated Revenue Class Action Lawsuit is Badesha Harpreet v. Cronos Group Inc., et al., Case No. CV-20-00641990-00CP, in the Ontario Superior Court of Justice, Canada.
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