CannTrust hit with ‘noncompliant’ rating for unlicensed cannabis cultivation

(This story has been updated with further analysis.)

Ontario-based licensed cannabis grower CannTrust was sanctioned by Health Canada for conducting unlicensed cultivation for six months and providing inaccurate information to the federal regulator.

CannTrust’s greenhouse facility in Pelham, Ontario, received a “noncompliant” rating by Health Canada for operating five unlicensed rooms.

At least 12,500 kilograms (27,500 pounds) of marijuana is being held back from the market, which will result in product shortages for its medical patients and adult-use customers, the company said Monday.

For context, the company harvested 9,400 kilograms in the entirety of the last financial quarter.

A producer can be assigned a noncompliant rating based on the number and seriousness of violations found by Health Canada’s inspectors.

Fourth noncompliant rating for Health Canada

It is only the fourth company to receive a rating of noncompliance since March 2017. In fiscal 2017-2018 more than 257 inspections were conducted.

All previous instances came after the regulator uncovered “critical observations,” which can be made for a deficiency that will increase diversion and/or cause health risks.

In fiscal year 2018, Agrima Botanicals received a noncompliant rating and Natural Med Company earned two such ratings. Warning letters were handed out in all three cases.

Health Canada went a step further this time, placing “a hold” on 5,200 kilograms of dried cannabis inventory that was harvested in the unsanctioned rooms, CannTrust said in a news release.

The hold will stay in effect until the regulator deems the company is compliant.

Additionally, CannTrust said it instituted “a voluntary hold” on roughly 7,500 kilograms of dried cannabis equivalent at its Vaughan manufacturing facility that had been produced in the unlicensed areas.

The growing in the unlicensed rooms took place from October 2018 until as recently as March 2019, during which time CannTrust said it had pending applications for the rooms.

The company said the rooms were eventually licensed in April.

International, domestic implications

It is unclear how much cannabis from the unlicensed rooms made its way to Canada’s registered medical patients or the recreational market, or whether any of these products were exported.

Experts say this could have implications for Canada’s cannabis companies overseas.

“This development is most certainly going to place challenges in terms of the reputation for Canadian suppliers of medical cannabis into the international markets they serve,” said Deepak Anand, CEO of Toronto cannabis firm Materia Ventures.

“This will further be amplified if it is found that products exported from Canada were not approved and might need to be withdrawn from those markets.”

Health Canada’s actions are a signal to the industry to heed the regulations.

Matt Maurer of Toronto-based Torkin Manes cannabis law group said Health Canada’s actions demonstrate that no licensee is above following the regulations set out by the federal government, regardless of the size of the company.

“It obviously is not clear what further action, if any, Health Canada may take,” he said, “but regardless, this signals to the rest of the industry that failure to strictly follow the requirements of the regulatory regime could have potentially dire consequences.”

Financial impact

Chris Damas, editor of Ontario-based BCMI Cannabis Report, said the frozen assets represent a huge amount of CannTrust’s inventories and expected production.

CannTrust had biological assets valued at 21.8 million Canadian dollars ($16.7 million) as of March 31, which he said they estimated would have produced 17,397 kilograms of saleable product.

“So, basically the fiasco wipes out a whole quarter of production,” he said, pending Health Canada’s decision on the held product.

Health Canada is conducting quality inspections on the confiscated samples from the Pelham greenhouse.

The company said the financial impact won’t be known until Health Canada completes its testing.

Results are expected in coming weeks, CannTrust said.

CannTrust said it retained external advisers to conduct an independent review, along with implementing other “corrective actions.”

Health Canada and CannTrust did not immediately reply to queries from Marijuana Business Daily for comment.

CannTrust shares trade as CTST on the New York Stock Exchange and as TRST on the Toronto Stock Exchange.

(This story will be updated as more information becomes available.)

Matt Lamers can be reached at [email protected]

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