CannTrust’s unlicensed growing scandal: A primer

Canada’s cannabis industry is abuzz this week with news about CannTrust, a major licensed cannabis producer based in Vaughan, Ont. that appears to have been caught in a serious violation of Health Canada’s cannabis rules. Here’s what we know so far.

On Monday, the publicly-traded company issued a press release disclosing that its greenhouse in Pelham, Ont. had been found “non-compliant with certain regulations” by Health Canada. The facility has twelve rooms for growing cannabis, but they weren’t all licensed for cannabis production at the same time. Health Canada discovered that CannTrust had been growing cannabis in five of those rooms before they had actually been licensed for cannabis production, between October 2018 and March 2019. (The five grow rooms in question weren’t licensed until April 2019.) On top of growing unlicensed cannabis, Health Canada said in a statement that the company gave “false and misleading information” to its inspectors and kept inadequate records. 

Health Canada said its inspectors seized 4,327 kilograms of “implicated product” from CannTrust’s Pelham facility in early July, and took samples for lab testing. (The total amount of cannabis being held back by Health Canada amounts to roughly 5,200 kilograms, according to CannTrust.)  CannTrust also says it has voluntarily set aside about 7,500 kilograms of “dried cannabis equivalent” that was produced in the unlicensed rooms, and told customers — including more than 72,000 medical cannabis patients registered with the company — to expect product shortages.

Some of the cannabis grown in the unlicensed rooms has already been shipped, and possibly even sold to consumers, according to information gathered by Financial Post cannabis reporter Vanmala Subramaniam. CannTrust CEO Peter Aceto declined comment to the Globe and Mail on whether or not management knew about the forbidden cannabis cultivation.

CannTrust shares have lost significant value since Monday’s revelations, and cannabis analysts at two major banks have downgraded their outlooks for the company. A New York securities litigation firm is also investigating CannTrust, presumably with an eye to a shareholder lawsuit. It’s also possible that CannTrust medical cannabis exported abroad could be impacted, and the company’s Danish partner is quarantining some product that was shipped to Denmark.

The biggest question for CannTrust and its investors is the future of the company’s valuable government cannabis licences. CannTrust has until July 18 to respond to Health Canada and explain what happened, after which the regulator will decide the company’s fate. Measures could include education on regulatory compliance, a formal warning letter, suspension or revocation of licences, a ministerial order seeking more information or requiring the company to take certain measures, or an administrative penalty of up to $1 million.

Health Canada has already showed its willingness to suspend cannabis licences for regulatory non-compliance, having suspended the licences of Agrima Botanicals and Bonify in months past. Other licensed producers will be watching closely to see whether CannTrust gets the same treatment.