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1.
   

CannTrust in 12 Tons of Trouble

Public Domain

Health Canada announced on Monday it had found CannTrust non-compliant for growing in five unlicensed rooms between October 2018 and March. CannTrust is the ninth largest Canadian LP by market cap.
The Leaf, MJ Biz Daily, Marijuana Index

  • The company also acknowledged in its statement that employees provided inaccurate information to Health Canada.
  • A surprise inspection in June led to the non-compliant finding on July 3. CannTrust has to submit a formal response to Health Canada by July 17 to explain how the unlicensed growing occurred.
  • CannTrust stressed the rooms in question received licenses in April.
  • Health Canada ordered CannTrust to hold back 5,200 kilograms of product grown in the unlicensed rooms at CannTrust's Pelham facility in Niagara, as well as another 7,500 kilograms grown in the unlicensed rooms and transported to CannTrust's Vaughan facility.
    Financial Post

The combined 12,700 kilograms is more than the 9,400 kilograms it harvested last quarter, and more than four times as much product as the 3,000 kilograms CannTrust sold. Samples grown in the illicit rooms will be tested by Health Canada in coming weeks.

  • Health Canada would not answer whether cannabis produced in unlicensed rooms qualifies under law as "illicit cannabis," but it won't affect consumers who possess the product in question.
    The Leaf
  • A Canaccord Genuity analyst said, "It is highly likely the company will be forced to destroy the product that was produced within the non-compliant grow rooms."
  • This isn't the first time CannTrust has caught regulators' attention. In February 2016, Health Canada seized 377 kilograms of product from CannTrust following numerous violations. Between April 2015 and March 2018, Health Canada made 15 "major" or "critical" observations during CannTrust site inspections.
    Bloomberg

Quick Hits

  1. Bruce Linton's non-compete agreement with Canopy means he'll have to work in the US, but he says cannabis is finished with Canada. He told Bloomberg, "Anybody who’s dumb enough to launch a new cannabis company in Canada, I don’t know what they’re doing, they should have been at it six years ago. Canada is done."
    Bloomberg
  2. Canopy is bringing chocolate back to its headquarters in Smith Fall's, ON's onetime Hershey factory. This time, the chocolate will be infused, and made in partnership with a local chocolatier.
    CBC Ottawa
  3. WeedWeek founder Alex Halperin got an exclusive interview with Acreage CEO Kevin Murphy.

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2.
   

Fake Walls!

Public Domain

A former CannTrust greenhouse employee who tipped off Health Canada on June 14 after quitting the company reported the greenhouse operations manager called for the installation of fake walls to hide "several thousand" plants as they took photos for Health Canada to meet licensing requirements.
Globe and Mail

Market-research firm Harvest Moon claimed CannTrust's employees were disgruntled after CannTrust's HR department leaked all employee payroll details, and ths motivated the tip-off to Health Canada.
Smart Money Gains

  • Harvest Moon states, "After the construction of grow rooms 4-5-6-7, without being a Health Canada-licensed area at the time[,] CannTrust populated the rooms with plants. Management instructed employers to do so[,] but prior they were asked to put up tarps, so no cameras could see."
  • "Master Grower Brady Green and Operations Manager Cam Fletcher […] are likely going to be the fall guys when CannTrust tries to shift blame," argued Harvest Moon. "However, there is no way that executives didn’t know what was going on even if they turned a blind eye to what was happening."
  • Harvest Moon founder "Betting Bruiser" posted a photo which purported to be of a CannTrust employee "[rolling] around in a million dollars worth of prerolls."
    Twitter—Betting Bruiser

Quick Hits

  1. More losses are coming for cannabis investors as LPs struggle to become profitable. Analysts expect many LPs will post writedowns from unfinished inventory.
    Bloomberg
  2. Organigram hasn't yet inked a partnership with any beverage maker, so ahead of Legalization 2.0 the company is developing a flavourless, dissolvable REC powder that consumers can mix with any drink to instantly "infuse" it.
    CBC New Brunswick
  3. Grocery monolith Loblaw filed a trademark application for the words "C Shop" and "CSHOP," associated with selling cannabis products, cannabis oils, edibles, live cannabis products, and smoking accessories.
    Twitter—Presumably Paul
3.
   

Fallout

Public Domain

The Ontario Cannabis Store pulled CannTrust products, but did not specify which ones. The Alberta Gaming and Liquor Corporation followed suit, placing some products on hold pending the results of Health Canada's investigation. Bloomberg, National Post

The Globe's Mark Rendell noted that in a sector with some questionable players, CannTrust was understood as a professional operation, helmed by Aceto, who helped transform the cannabis sector when he joined CannTrust from his former position at Tangerine Bank.
Globe and Mail

  • The company has partnerships with Breakthru Beverage Group and Apotex, Canada's largest generic drug producer, and is listed on the New York Stock Exchange.
  • Further partnerships may not be forthcoming, warned Jefferies analyst Ryan Tomkins. He said, "This [scandal will] make them less appealing for possible [fast-moving consumer goods] partners. […]This will make institutional investors think twice."
    MarketWatch
  • Aceto said CannTrust fired one employee over the unlicensed growing and would conduct a third-party "root-cause analysis."
  • "Mistakes were absolutely made at CannTrust," Aceto said. "We have got a very clear process in place that is going to get us back into compliance as soon as possible.

Quick Hits

  1. The National Bank of Canada's VP of ETFs and financial products research warned investors that within a couple of years, cannabis will no longer be a trendy investment and cannabis ETFs will face a "day of reckoning."
    Bloomberg
  2. When Health Canada overhauled its application process in May, existing applicants in the system were supposed to have been subject to "high level review," which the agency estimated would be finished in June. To date, 75% of the reviews (450 of 580 applications) have been done, but insiders said it won't likely be finished until next year.
    MJ Biz Daily
  3. The Prince Edward Cannabis Management Corporation ended the first six months of legal REC sales with a $483,000 loss, which was canceled out by the province's $546,000 share of excise taxes.
    CBC PEI
4.
   

$400M in Lost Value May
Just Be the Beginning

Public Domain

Analysts said the scandal will affect CannTrust for some time, beginning with the likely loss of sales from the 12,700 kilos of illicit cannabis. Bank of America Merrill Lynch analyst Christopher Carey said, "Due to uncertainty on go-forward financials, exacerbated by likely diminishing investor confidence, we see shares remaining weak."
Bloomberg

  • Bank of Montreal and Royal Bank of Canada both downgraded CannTrust and lowered their target prices as CannTrust's shares sank. By Friday—four days into the crisis—CannTrust shares were down 44%, representing roughly $400M in market-value losses.
    Financial Post, The Straight, Bloomberg
  • CannTrust bought 81 acres in BC with which to build an outdoor production site, and initially predicted it could yield 75,000 kilograms per year. On July 3, due to license delays, the company announced the most it could yield this year would be 15,000 kilograms, provided the site was licensed and CannTrust planted its crop by August 5. That's not going to happen on schedule.
    Business in Vancouver
  • Referring to CannTrust's open application to grow outdoors, Lifford Cannabis CEO Lisa Campbell said, "just over $50 million in wholesale revenue on hold. Outdoor cultivation licence also 99.9% not happening. 75,000kg was 15,000kg as of last week is now 0kg expected outdoor yield." She estimated the choice to grow in unlicensed rooms will cost CannTrust $350M in seized stock and lost outdoor revenues.
    Twitter
  • Two US law firms are investigating CannTrust toward class-action lawsuits, and calling for those who invested in the company to contact them. Bloomberg's David George-Cosh reported he has received press releases from nine law firms launching CannTrust class actions.
    Press Releases, Twitter

Founder and chairman Eric Paul said he wouldn't call for CannTrust's senior management to resign, though he couldn't explain why management was unaware that thousands of kilos of cannabis was grown in unlicensed rooms over six months. Paul said, "It was quite a shock when I found out about it."
Bloomberg

  • Analyst Mike Zmuda noted, "It's possible senior management was told the grow areas were properly licensed. Most of that workflow falls on the operational side. [… But] it is a very unlikely scenario."
    Twitter
  • Cannalyst Craig "GoBlueCDN" Wiggins noted, "Eric Paul signed the audited year end financial [statements] where in the notes under Biological Assets they recorded (at the time) a record amount of Projected Yield. […] No one in [CannTrust] executive noticed this DOUBLING of Project Yield QoQ without new rooms?"
    Twitter

Quick Hits

  1. Citing the difficulty involved in caring for living plants, BC's Liquor Distribution Board announced it would not carry clones. A spokesperson for the LDB said the only way BC consumers could access clones would be if LPs were allowed to sell to them directly, but direct sales by LPs are against BC's cannabis law.
    MJ Biz Daily
  2. Organizers of the Journey Cannabis and Music Festival were forced to cancel the three-day music and bring-your-own-cannabis festival in Vaughan, ON after the City of Vaughan passed a bylaw outlawing smoking within the city boundaries. They claimed at no point during their permit meetings with the city did anyone mention the smoking ban.
    The Leaf
  3. The Wildfire Collective is a farm-style co-op that grows exclusively outdoors, and founder Mark Spear told the Globe is goal was to focus on producing small batches of high-quality product.
    Globe and Mail
  4. Companies producing edibles will likely start with only a few products, possibly based on the top-selling products in the US REC-legal states.
    The Star
5.
   

Postmortem

https://commons.wikimedia.org/wiki/User:Waielbi

Deepak Anand highlighted the role of regulatory delay in the CannTrust scandal. The average turnaround for additional grow-room applications by companies that already have Health Canada licenses is at least 10 to 12 weeks, but respondants to Anand said they'd experienced delays of "About 58 days," six to eight weeks on average, and "30 days just to get a confirmation of an inspection date and then 3-6 months to schedule the inspection."

  • Anand said, "This is absolutely ridiculous. I can't fathom how no one is talking about this?! The pressure on licence holders is stupid given the constraints. It's no surprise that so many are bending the law!"
    Twitter
  • Anand also highlighted Health Canada's inspection data, which had not been updated since March and did not show CannTrust's non-compliant rating. While Health Canada's inspection data for drug and medical-device license holders "are updated almost real time," the same transparency doesn't exist for cannabis license holders.
    Twitter

Bloomberg's Jon Erlichman wondered, "Did we get too greedy with these cannabis stocks? Are investors partly at fault for expecting so much from such a young industry?"
Twitter—Nick Pateras

  • Stonecastle Investments founder Bruce Campbell said, "This is probably one of those growing pains of going from being an illegal business to a legal business. When it was an illegal business, people could do whatever they wanted and the only thing they had to watch out for was the RCMP showing up at their door."
    Financial Post
  • The scandal is a "wake-up call" for the sector, said Dentons partner Eric Foster, while York University governance and law professor Richard Leblanc said it marked the need for more independent board members concerned with compliance and regulatory risk.
    Bloomberg
  • BC Independent Cannabis Association president Courtland Sandover-Sly said, "Assumptions we can make about CannTrust: 1) They're not the only ones breaking the law. 2) Nobody will ever be arrested, or even detained, over the 12,000kgs. 3) CannTrust will get a slap on the wrist for this (while black-market growers would get mandatory minimum sentences)."
    Twitter
  • Grower Ryan Lee said, "Canntrust was the nail in the coffin [of] Canadian cannabis investments. […] Some of the biggest scams have yet to be made public, this shit show is not over. […] These pubcos have proven no more trustworthy that [MMAR individual] growers diverting cannabis & spraying toxic chemicals."
    Twitter
  • Calling for Health Canada to make an example of CannTrust, Equity Guru argued, "Management either didn’t know, in which case Canntrust is guilty of a staggering level of executive incompetence, which should see their entire operation reviewed and audited and executives roundly and unapologetically fired, or they knew, figured they’d get away with it, and their entire operation should be reviewed and audited, and the executives fired, and their licenses revoked."
    Equity Guru
  • Cannalysts' managing director Andrew "Mollytime" Udell said, "That a company - that's one of the earliest and with TRUST in its fucking name no less - pulls some ghetto black-market-back-alley-bullshit....man. I'm spitting nails. […] There was no need to do it. Only greed. And here's an example of how to fix it: Greg Engel came into the clusterfuck of OGI and bad press and cleaned the fucking house. […] That is exactly what this fucking industry needs. […] We need a new world. One that is serious and professional and purposeful. We need adults in the fucking room."
    Reddit, Equity Guru

Quick Hits

  1. The owner of the Niagara Falls' "all-inclusive" Pink Elephant Inn plans to give guests cannabis as part of their rental, though the legality of doing so is questionable.
    St. Catherines Standard
6.
   

Illegal Weed Getting Cheaper, Legal Prices Rising

Public Domain

According to Statistics Canada, the price of illegal cannabis is going down attracting more buyers, aswhile the price of legal product is going up.

  • In Stats Can's Q2 2019 Crowdsourced Cannabis Prices numbers, 59% of respondents bought illict cannabis, over 55% in Q1.
  • The number who said they chose illicit cannabis because legal product was too expensive increased to 34% from 27% in Q1.

Deloitte analyst Rishi Malkani noted, "The fact of the matter is everyone is just using vapeable oils right now and those are only available through the illegal market. After December when you’ve got people filling the gap in products available in the illegal and legal markets, you’re going to see another big push to the legal channel like you did when dried flower first became legal."

  • The average price of illicit cannabis across Canada was $5.93, down from $6.23 in Q1, while the average price of legal cannabis increased to $10.65 from $10.21. The difference between averages prices is 80%.
    CBC Business, Vancouver Sun
  • Much of the illicit dry flower available on Mail Order Marijuana sites is of significantly higher quality than many LP products, a friction that grower Ryan Lee considered the greatest impediment to the legal market. He asked, "Do we really expect Canadians to consume an inferior product because it is legal & avoid breaking the law?"
    National Magazine, Twitter

Quick Hits

  1. A Vancouver moviegoer said he was "shocked" to see an ad from Canopy showing someone rolling a joint. Chris Whelan doesn't think ads should be shown before movies anyway, but opposes cannabis ads because he was "brought up thinking that this is something you don't do openly." The Cineplex VIP cinema said they only showed cannabis ads before movies classified as "Restricted," barring minors.
    CBC Vancouver
  2. A Twitter user noticed WeedMD's product pages disappeared from the Ontario Cannabis Store website, and were replaced by their new REC brand Color Cannabis "at a ~20% price increase." Twitter—WhatsMyPot
  3. For those looking to buy environmentally sound cannabis, here's a breakdown of percentages of clean energy and organic output for Canada's six "greenest" companies.
    Corporate Knights
7.
   

Alberta on Track for 200 REC Stores

https://www.flickr.com/photos/87306045@N05

Alberta Gaming, Liquor and Cannabis licensed another 20 REC stores this week, bringing their total to 176. At this rate they will hit 200 before the end of the month. Ontario may have as many as 75 starting three months from now.
Globe and Mail

  • Alberta has received $30M in its 75% share of federal cannabis excise taxes since legalization.
    Calgary Herald
  • The sum was $4M more than the government expected, which it said was " due to higher than expected AGLC purchases of recreational cannabis from licensed producers."

Quick Hits

  1. Tantalus Labs founder Dan Sutton pressed for provinces to rethink their REC retail approach, saying there is a straight correlation between the volume of cannabis consumers have purchased and their access to retail stores. "Canada has <300 stores. We need 5000+. It is going to be ugly quarter after ugly quarter for bellwether LPs until provinces materially ramp to meet demand," Sutton said.
    Twitter
  2. The SQDC will open another seven new locations across Quebec, adding to five previously announced upcoming openings. That will bring the number of SQDC stores from the present 16 to 28. The Crown corporation plans to have 40 stores by March.
    CBC Montreal
  3. Vancouver REC retailers Muse Cannabis complained about provincial laws requiring them to have fogged windows, arguing they've put time and effort into "the detail and the aesthetic." They'd also like to be allowed to advertise.
    DailyHive
8.
   

Health Canada Research Regs Preventing Research

https://www.flickr.com/people/theenmoy/

Doctors, patients, and researchers need cannabis research. The Conservatives are calling for cannabis research. The Liberal government has millions in funding to offer for cannabis research. What's the catch? The process of applying for Health Canada approval is so difficult that it dissuades research, according to academics.
CTV News

  • Health Canada's regulatory requirements for cannabis research are similar to those required of licensed producers.
  • In one case, a professor noted that no permits or exemptions were required to run identical impaired-driving research with alcohol.
  • Health Canada said its regulations handled "otherwise prohibited activities with cannabis," but couldn't explain what that term meant after REC legalization.
  • Responding to this article, former Ontario NDP premier (and later interim federal Liberal leader) Bob Rae argued Canada is "losing competitive advantage in cannabis research and product development that should have followed from the legalization decision."
    The Straight

Quick Hits

  1. Whether THC makes you feel pleasant or paranoid is decided in a part of the brain called the nucleus accumbens, according to two Western University researchers in a new study published in Scientific Reports. The researchers believe dramatically different reactions to THC are caused by individual sensitivity in that area of the brain.
    Canoe.com
  2. When it comes to edibles, most companies have little idea how to define "appealing to children," which according to Health Canada, their products and packaging must not be.
    Botaniq
  3. Health-insurance premiums may go up for those who use edibles, since the industry considers that delivery method more likely to lead to harm.
    The Star
9.
   

Toronto Attempting to Shut Down Holdout Dispensaries

Jesse staniforth
CAFE's Fort-York Blvd Location

Toronto police raided one of the holdout locations of Toronto dispensary chain CAFE. The Ford government recently closed a legal loophole preventing dispensary raids on locations in which people lived, and police evicted one angry man who tried to push his way through police, who claimed he had nothing to do with the dispensary but was just a tenant getting cheap rent.
CityNews, CBC Toronto

  • CAFE pioneered use of the loophole to prevent raids.
  • Bylaw enforcement officers said they had intended to block the entrance with concrete blocks, to prevent owners from reopening the stores, but the machine operator said overhead wires were too low to safely crane the blocks into place.

Quick Hits

  1. The RCMP's federal and serious crimes unit conducted a series of raids in the Vancouver suburbs, netting 1,180 kilos of illicit cannabis that had been produced in a licensed MED facility for export to Europe and arresting six. They also seized 5,300 plants from the facility that was licensed to grow 300.
    Vancouver Sun
  2. Dartmouth, NS, police raided the Atlantic Compassion Club Society, charging 13.
    CBC Nova Scotia
10.
   

Saskatchewan Asks Ottawa to Crack Down on Native Dispensaries

https://flickr.com/people/38144472@N04

Saskatchewan's Conservative justice minister Don Morgan called on the federal government "to take some steps" to intervene and shut down dispensaries in Muscowpetung First Nation and Pheasant Rump Nakota Nation, each of which have introduced their own cannabis regulations independent of the province and federal government.
CBC Saskatchewan

  • Morgan told public safety minister Ralph Goodale the First Nations dispensaries were competing with provincially regulated REC stores, and also because the province could not track what the dispensaries sold.
  • Provinces do not have jurisdiction over First Nations, hence the call to Ottawa.
  • Most are aware an RCMP raid First Nations cannabis businesses operating within regulations imposed by the Nations in question could escalate very quickly into something nobody wants, be it standoff, protracted conflict, or court case. Trudeau is a deeply unpopular figure across most First Nations and a federal raid could open up another front on which for Indigenous critics to attack him.
  • Federation of Sovereign Indigenous Nations Chief Chief Cameron argued police should instead be focusing on illegal drugs and gangs. The First Nations dispensaries, he said, "are practicing and asserting their jurisdiction and sovereignty. They're trying to create employment and generate revenue with what little they've got to improve some of the projects and housing on reserve."

Quick Hits

  1. Saskatchewan's Country Thunder doesn't ban cannabis, but requires attendees to follow the law banning cannabis smoking in places where tobacco can be smoked. Whether you're going to Country Thunder or another summer music festival, Exclaim! has a guide to smoking cannabis at festivals from province to province.
    Global, Exclaim!
  2. BC cannabis law explicitly prohibits REC retail employees from warning anyone about the presence cannabis enforcement officers. The text of the law, I kid you not, reads, "Actions such as announcing the arrival of inspectors, raising or flashing lights, turning down music, playing particular soundtracks (e.g. “Bad Boys” or “Hawaii Five O”), using spotlights, or any other similar actions are not permitted."
    Leafly, Government of BC
  3. It doesn't matter whether the original plants were blessed by a rabbi, said other rabbis. "Kosher Kush" is not good name for a type of cannabis, even if cannabis isn't a food product and therefore not subject to Jewish dietary law.
    The Leaf

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