Acreage Holdings of New York, a multistate cannabis company operating in multiple states, has agreed to settle with the U.S. Securities and Exchange Commission for a fine of $225,000. This settlement stems from a late-2019 transaction.
Canopy USA LLC acquired Acreage recently, allowing Canadian marijuana titan Canopy Growth Corp. pursue opportunities in U.S. cannabis through a nonconsolidated non-controlling interest of Canopy USA.
According to an SEC cease and desist order dated January 10, Acreage violated Securities Exchange Act of 1934 by orchestrating a round-trip transfer of nearly $4.2 Million of cash from an affiliated but nonconsolidated entity (“Entity A”) during December 2019 or January 2020.
Acreage was not the owner of Entity A, but had contractual arrangements that included a service and management consulting agreement. Acreage’s services to Entity A include billing, operational support on a day-today basis, employee training and “financial controls, planning and access to capital,” as per the SEC.
According to the SEC, the nearly $4.2-million transfer of cash between the two companies temporarily increased Acreage’s 2019 year-end cash balance in its internal accounting records. This was in violation of Section 13.b)(2)(A), of the Exchange Act.
The order states: “Acreage arranged for Entity A, shortly before the end of Acreage’s fiscal year, which ended on December 31, 2019, to transfer approximately $4,2 million to Acreage’s bank account, with the express understanding Acreage would refund all the money back to Entity A early in January 2020, following the end of FY 2019.” “Acreage has received cash from Entity A of about $4.2 million on December 26, 2019. Acreage will return that exact amount of money to Entity A at the end of FY 2019, which is January 3, 2020.”
Acreage, according to the order created financial records misrepresenting the round-trip transactions, firstly as a repayment of debt owed by EntityA and then as an unsecured loan from EntityA to Acreage.
Both characterizations misrepresented what the transfers were really like, according to the SEC order. After certain employees raised concerns about the roundtrip transaction to a member Acreage’s board of director and the director started making inquiries, Acreage entered an additional journal entry which effectively reversed this transaction from an accounting standpoint. The money Acreage received from Entity A wasn’t included in Acreage’s publicly reported financial statement for FY 2019.
According to the SEC, during the audit of Acreage’s financial statements for FY 2019, Acreage provided to the accounting firm performing the audit written documents that misrepresented and omitted important facts about the roundtrip cash transfer with Entity A.
The SEC reported that during the audit of Acreage’s 2019 fiscal year financial statements, Acreage also provided documents in which material facts regarding the round-trip transfers were misrepresented or omitted.
According to the SEC order dated Jan. 10, Acreage’s management was increasingly concerned with the company’s financial situation in late 2019.
“On Nov. 26, 2019, a senior officer of Acreage (“Officer A”) emailed another senior officer (“Officer B”) with the subject line ‘Cash Flow’ and wrote: ‘Let’s discuss tomorrow. All of our competitors show [cash flow] positive. Why are we still so far behind? The order says: During this time, analysts focused their attention on the cash positions of cannabis companies, including Acreage.
The SEC reported that Entity A had owed Acreage $4.65 in principal plus additional interest amounts on its line of credit. According to the SEC, Acreage did not typically require Entity A, until then, to pay management fees under the services contract or repay any amounts owned on the line of credit.
In November 2019, Acreage senior management members were looking for ways to increase the cash flow of the company before the end-of-year reporting period. They focused on the amount Entity A had accrued to the firm over the years. Acreage employees who provided accounting to Entity A informed Acreage managers that Entity A appeared to be able to afford a $1.5M payment.
The SEC reports that in December 2019, Acreage senior management came up with a plan to transfer nearly $4.2M round-trip to Entity A, instead of asking Entity A’s debt to be paid down under the credit line.
The order of the SEC dated January 10 states that “On or near December 24, 2019, Officer A along with two other senior Acreage officers (Officers C and D) called Entity A’s Chief Executive Officer.” “During the phone call, Officer A told Entity A’s CEO to send Acreage all of Entity A’s cash, except for that which was required to cover Entity A’s immediate short term expenses. Officer A assured Entity A CEO that Acreage was going to return Entity A the money in January 2020. Entity A’s CEO initially opposed the request, but eventually acceded. The CEO of Entity A asked Acreage to put in writing that it would return Entity A the money at the start of January.
Entity A’s chief executive officer initiated a wire transaction of $4,164.458.06 into Acreage’s bank account after Acreage had written it in writing that it would refund the money. This temporarily increased Acreage’s cash balance from $26.5 to $30.7, an increase of approximately 15%.
The SEC stated that Acreage, Entity A and Entity B both knew from the beginning that the transfer of cash was not a genuine repayment of a debt. Acreage’s accounting staff recorded the cash transfer as part of a credit for “Investments: Consolidated Investment in” on Jan. 3, 20. [Entity A]The SEC reports that the staff made the change from an asset account to a liability one on January 7, changing it to “Other Current Liabilities”.
According to the SEC, Acreage senior management instructed the company’s accountants to enter a journal entry on Jan. 17, 2021, to incorrectly reflect that the funds had been returned to Entity A three days earlier, on Dec. 31, 2019.
The order of Jan. 10, states that “this entry effectively reversed this transaction from an accounting standpoint and negated any impact on Acreage’s publicly reported financial statement, treating the cash transfers essentially as if both had occurred in December 2019”. “This entry was created a few weeks after [one of Acreage’s board directors] Begun questioning Officer B regarding the round-trip money transfer.”
According to SEC, Acreage, in May of 2020, created and sent two documents to a firm charged with auditing financial statements for the fiscal year 2019, which contained “materially misleading and false statements” regarding the year-end transfers with Entity A.
The SEC issued an order to Acreage on Jan. 10, 2024 ordering them to cease and desist any further violations of Section 13b)(2)(A).
Acreage was also ordered by the SEC to pay a fine of $225,000 in 10 days.