The Canadian cannabis industry had a promising beginning, but the “Green Rush” has significantly slowed in recent months.
Now, the industry is facing a long list of challenges: Lacklustre sales, a slow rollout of retail outlets, competition from the illicit market and waning enthusiasm among investors, to name a few.
But bad behaviour on the part of licensed cannabis cultivators has generated more interest across the country than any other problem.
Some industry observers attribute contraventions of the Cannabis Act (which replaced the Access to Cannabis for Medical Purposes Regulations in 2018) and securities infractions to increasing pressure from consumers and investors. But some balk at that notion.
“I hate that reasoning,” says PI Financial analyst Jason Zandberg. “It is pure and simple greed or arrogance. To try to switch the blame to external pressure is a cop-out.”
Others were less certain.
“We can’t delve into the minds of Canadian cannabis company executives who caused, directed, or tacitly endorsed, fraudulent, regulation-breaking behaviour at their companies,” adds Chris Damas, cannabis analyst and author of The BCMI Report. “The cannabis industry is hyper-competitive. There is no doubt about that. But during the period when many these of these infractions occurred, investors were very forgiving of delays in production and supply. Executives can blame neither investors nor consumers for their actions.”
Here are four of the most publicized mis-steps by licensed producers over the past five years:
Canopy’s mysterious plane filled with cannabis: 2014
In April 2014, Health Canada introduced rules that restricted production of medical cannabis to licensed producers. Around that time, two Ontario producers — who were among the first to be licensed — were at the centre of a drug bust.
RCMP officers in Kelowna, B.C. intercepted two shipments of cannabis bound for Tweed Marijuana and Mettrum. (Tweed later became Canopy Growth and it acquired Mettrum in 2017.)
According to internal RCMP documents obtained by the National Post last year through an access-to-information request, the producers had told Health Canada they would be transporting cannabis plants, but the shipments contained something else — more than 700 kilograms of harvested buds that were packaged for resale.
The internal documents indicated the Mounties hesitated to release the information out of concerns it might affect the stock price of Tweed, which had just become the first cannabis company to go public on the TSX, and might embarrass Health Canada by exposing deficiencies with the new cannabis production regulations.
Tweed put out a press release claiming they had invited the Mounties to examine the shipment — a claim which the Mounties deemed to be untrue, according to the internal documents.
The cannabis was later destroyed. No charges were filed.
OrganiGram loses organic certification: 2016-17
In late 2016 and early 2017 OrganiGram recalled medical cannabis that had been produced between February and December 2016 because it contained pesticides that were banned for use on cannabis plants under the Pest Control Products Act. The New Brunswick-based company lost its organic certification. It ended up refunding customers who had purchased the tainted product at a cost of $2.26-million, but the company later faced a class-action lawsuit.
Zandberg describes the pesticide contamination as “brazen and arrogant move” by the company. In his view, it was a more serious transgression than those committed by other producers in subsequent years, but didn’t have as big an impact on the market because, at the time, the industry was booming and drawing enthusiastic investors.
“In the early days, some licensed producers were cutting corners,” Zandberg says. “Part of the problem was that Health Canada didn’t have enough supervision and overview of the markets.” But Zandberg feels reassured that the company’s management has learned its lesson from those previous mistakes.
After the recalls, Greg Engel took over as OrganiGram’s chief executive officer “to make a major cultural shift” and the company has been regaining its footing, according to industry analysts. Zandberg says the company has “done a great job of turning things around.” Last week, another market analyst put the company’s stock high on the list of cannabis stocks to buy and hold.
Bonify’s illicit cannabis stash: 2018
In December 2018, Health Canada issued two recalls of product produced by Manitoba-based Bonify. The product was unauthorized and contained traces of bacteria, yeast and mould. Health Canada suspended the company’s sales licence.
George Robinson, the head of RavenQuest BioMed, which was hired to take over Bonify on a temporary basis after it fired three of its executives, said some front-line staff had been pressured into looking the other way rather than reporting the 200 kilograms of unlicensed cannabis at the company’s production facility in Winnipeg.
An investigation failed to determine the source of the illegal cannabis. Health Canada reinstated the producer’s sales licence in October 2019.
Robinson said there were lessons to be learned from the incident: “Follow the rules, train your staff and run a clean, well-designed facility capable of producing high quality cannabis without cutting corners.”
CannTrust’s hidden, illicit grow: 2019
One of the biggest stories in the Canadian cannabis industry in 2019 focused on CannTrust. The Ontario-based producer landed in hot water with regulators for growing cannabis in five unlicensed rooms at its facility in the Niagara region.
In September, regulators suspended the company’s licence to produce and sell cannabis.
It was discovered that some company executives had known about the unlicensed pot about seven months before government regulators raised the issue, but chose not to stop it. Also, the company had attempted to hide the illicit grow from regulators.
In the fallout, the company fired its CEO and cut its workforce. The incident caused concern among consumers, investors and others about how the legal cannabis industry operates in this country.
No criminal charges have been laid, but the company still cannot legally produce cannabis in Canada.
“This scandal had the biggest impact on the market because of the boldness of it, and because it happened at a time when the market was in decline,” says Zandberg. “This incident contributed to the problem.”
“Investors were very unforgiving of major regulatory non-compliance along the lines of what CannTrust produced,” says Damas. “That incident had the biggest impact on investor confidence in 2019.”
Damas says corporate governance and board independence “remains abysmally poor at almost all the top twelve largest cannabis companies,” and he believes that could result in some more management behaviour “that is contrary to the interests of the public shareholders.”
However, he also believes bad actors and weaker companies will gradually exit the market, leaving “fewer, but larger and better-managed companies.”
“You will see fewer scandals,” Zandberg adds, citing the pesticides issue as an example. “It was a big problem at one point but it isn’t now. As the industry evolves we’ll see less cheating and fewer scandals.”
But he adds a cautionary note: “There will be some cheating,” he says. “There always is.”
Authored By: The Growth Op Article category: Marijuana Business News Marijuana Politics Regional Marijuana News: Canada
READ MORE: https://420intel.ca/articles/2020/02/07/canadas-most-publicized-cannabis-industry-scandals