Canada edition / November 23, 2019
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1 HEALTH CANADA: “HEXO’S OK”

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JESSE STANIFORTH Hexo Master Grower Agnes Kwasniewska, October 2018

We left last week on the breaking news that Hexo admitted "a limited quantity" of cannabis was grown in unlicensed areas (called "Block B") of its UP Cannabis Niagara production facility acquired when it absorbed Newstrike in May. (The facility was mothballed in October.)
Financial Post, Bloomberg

Health Canada confirmed Hexo's version of the story, noting "Hexo proactively notified Health Canada and took actions to rectify the situation and return to compliance." The regulator judged the efforts "acceptable." This is a stark contrast to CannTrust's extensive efforts to cover up illegal growing.
MJ Biz Daily, Globe and Mail

Health Canada visited Block B in February 2019 as part of a facility inspection and did not notice unlicensed growing.

  • Insiders said the increase in the number of LPs along with requests for site-amendments to prepare production facilities for 2.0 products left Health Canada inspectors "overwhelmed" and reliant upon LPs to supply information about their compliance "in good faith."
    Financial Post
  • After the CannTrust scandal this summer, an insider told me Health Canada was asking LPs to print out diagrams of their facilities showing licensed and unlicensed rooms. Following the Hexo revelations, that person told me, "HC will go through every single door with the facility blueprints now."

Canaccord Genuity cried foul that though the unlicensed growing was discovered and reported in July, it was not part of fiscal Q4 earnings report that included news Hexo was shutting down the location in question.
Twitter—Andrew Bell

Friday morning, less than 12 hours before releasing a press release acknowledging the unlicensed growing, Hexo discounted its products by as much as 30% in the Ontario Cannabis Store.
Twitter—What's My Pot

2 DESPAIR STALKS INDUSTRY

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PUBLIC DOMAIN/EDVARD MUNSCH

The last week's headlines about the sector's earnings reports offered a variety of descriptors, all of them depressing. The "brutal" week was a "bloodletting," a "bloodbath," a "sea of red," a "flameout […] almost as bad as the dot-com bust." The Canadian market "continues its downward spiral," "the [cannabis] space could be the penalty box," and "The Pot stock bubble has burst." As for companies struggling to make it, "Some of these guys are going to disappear."
Financial Post, Bloomberg, HuffPost, MarketWatch, Canada.Com, Digital Journal, Financial Post, LA Times, CTV News

Cannabis sales volumes have grown by only 5.6% in the past quarter, while the number of products on the REC market grew by 20%.

  • Ernst & Young cannabis manager Ashley Chiu suspected LPs convinced regulators to allow them to price legal REC far higher than illicit REC because they counted on excitement about legalization lasting longer than it did.
  • REC prices declined 2.3% between January and October.
    Twitter—David George-Cosh

Everyone agrees Ontario's inability to get REC stores open has been a blow to the fledgling legal market. Canopy CEO Mark Zekulin said, "Ontario represents 40% of the country’s population yet has one retail cannabis store per 600,000 people. […] The addressable market is nearly half what is expected.
Huffpost, MarketWatch

 
 
This week on the podcast
A Year of Growing Legally

3 WHAT NEXT?

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HTTPS://WWW.FLICKR.COM/PEOPLE/55635450@N04

Cannabis stocks have begun tentatively to nose their way up, following eight months of decline that sheared two thirds off cannabis stock values. Pot stocks had their best three days since January this week.
Bloomberg

  • Statistics Canada figures show the legal REC industry grew 185% between legalization in October 2018 and August 2019.
    Twitter—Monteviale
  • The next question is: will the mood of calamity doom the 2.0 rollout?
    Financial Post
  • New cannabis consumers—whom the sector desperately wants to court—are interested in products and ingestibles. LPs have spent all year banking on the success of the coming vape pens, edibles, and beverages.
  • But many fear the costly mistake of investing too much in products no one wants—as Canopy did with oils and softgels. Legalization 2.0 offers more products for companies to gamble on, but the same near-total-lack of market research.
    Youtube/Government of Canada

Industry opened a new front against Health Canada as CEOs from Aurora, Tilray, SupremeOrganigram, Canopy, Hexo, and other LPs published an open letter calling for Ottawa to end multiple cannabis excise tax stamps for each separate province.
Financial Post

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4 ONTARIO TRIES TO GET REC RETAIL RIGHT

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HTTPS://WWW.FLICKR.COM/PHOTOS/54549113@N00

Ontario is moving toward a "hybrid" REC wholesale system. Though the province will still participate in REC wholesale, private contractors will soon be allowed distribute REC to retailers. LPs have complained for some time the existence of a provincial wholesaler increased per-gram prices.
Financial Post

Everyone agrees something needs to change in Ontario REC retail, and most agree the principal concern is the hugely populous province's small number of REC stores.
Global News

An Ontario government insider said the province is will abandon its doomed REC retail lottery system in favour of an "open allocation" system that would allow prospective retailers to apply online and pass background checks for quick approval to run a REC store.
Bloomberg

  • There's no fixed date at which that system might begin, but provincial finance minister Rod Phillips said they would announce it "when conditions are right."
  • Premier Doug Ford told reporters his government did not fail in the REC retail rollout, but rather "we didn’t have enough cannabis to sell but now there’s enough supply and we’re working hand-in-hand with [LPs]."
  • Industry critics continued to disagree with Ford, saying supply has been strong for some time, but Ontario is still flailing.
    Windsor Star
  • One of the 24 stores that opened in Ontario since April has annual revenue of roughly $20M.
    Twitter—David George-Cosh

Windsor's city council has reversed a decision delegating authority for processing individual REC store applications to city administrators after administrators, pressured by police, opposed the city's first REC store.
Windsor Star

Quick Hits

  1. Toronto city councillor, Beaches-East York Coun. Brad Bradford, joined the fight against locating a REC store within four doors of a Montessori pre-school. He did not oppose the pub located three doors from said Montessori pre-school since 1982.
    Toronto.com

5 SEPTEMBER SALES DECLINED

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PUBLIC DOMAIN

Though REC sales have increased since February with every new store open, they finally hit the wall in September and dropped from their August apex of $125M down to $122M across most Eastern Canadian provinces--except Quebec, whose SQDC has continueed opening new REC stores and thus increased its cannabis sales by 5%.
Twitter—Patrick Cain, Global News

Quick Hits

  1. According to a new report from Public Safety Canada, 2.5 tons of illicit cannabis per year is shipped out of Canada.
    Toronto Sun
  2. A special agent of the US DEA told Montreal tabloid the Journal de Montréal that since legalization, seizures of cannabis have spiked by 3,300%—and they blamed Canada.
    Journal de Montréal—In French

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6 QUEBEC REJECTS VAPE PRODUCTS

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JESSE STANIFORTH

Quebec's monopoly REC retailer, the Société Québécoise du Cannabis, confirmed it will not carry vaping products when they enter the market next month.
MJ Biz Daily

  • An SQDC spokesperson said, "in the light of many health problems recently discovered in the U.S., we’re uncomfortable with the idea of selling such products. "
  • Last week, the US Centres for Disease Control linked VAPI to illicit thickening agent vitamin E acetate—which isn't allowed in Canadian products.
  • Quebec National Public Health Director Dr. Horacio Arruda did not agree, saying, "The cause of these illnesses remains indeterminate."
    Le Devoir—In French
  • The Canadian Medical Association called for a ban on all e-cigarettes.
    CMAJ

The Quebec Cannabis Industry Association accused the Quebec government of "ignoring reality."
NewsWire, Grizzle

Following several months of fruitless negotiations between the SQDC and the various unions accredited at 20 of the 30 SQDC stores, the Quebec labour minister named a special mediator to help secure the first collective agreement between the SQDC and its employees.

  • The main issue of contention is salary. Wages for workers at the Société des Alcools du Québec, the provincial liquor organization, start at $20.46 per hour, while SQDC salaries start at $14.25.
    Ici Radio-Canada—In French

7 VICTORIA COMPASSION CLUB RAID SPARKS RESISTANCE

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MATT LOVE / VICTORIA CANNABIS BUYERS' CLUB

The day after BC's provincial Community Safety Unit raided the Victoria Cannabis Buyers Club, MED patients defiantly packed the non-profit compassion club, as protestors supporting the Club gathered on the steps of the provincial legislature. They plan to protest the raid every Friday at noon.
CTV News, Castanet, Victoria Times-Colonist, CBC British Columbia

The BC government acknowledged that unlicensed cannabis is part of the economy of the Central Kootenays region, home to an estimated 2,500 growers, as it launched the $675,000 Cannabis Business Transition Initiative to help bring legacy growers into the legal economy.

Quick Hits

  1. Researchers at the University of British Columbia, who published their work in journal PLOS Medicine, found those with chronic pain had "sireduced "significantly lower odds of daily illicit opioid use" when they began using daily MED instead.
    UBC News
  2. Drug researchers railed against Health Canada's onerous restrictions on accessing cannabis for research.
    Policy Options

8 AURORA PROLONGS ITS CONVERTIBLE DEBT

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HTTPS://WWW.FLICKR.COM/PHOTOS/131265878@N02

Aurora reported stockholders of 94% (worth roughly $230M) of its convertible debentures—bonds paying 5% interest that may be converted to stocks at a fixed rate—agreed to a company plan to offer 6% discounts on prematurely converting their debentures to stocks. The deal will help lower Aurora's debt--albeit at the risk of diluting the company's stock.
Newswire, The Deep Dive, Market Realist

Analysts have been sounding the alarm about the predominance of risky convertible debt for some time. Unless the market rises and companies flourish, convertible debentures can shackle firms to punishing interest.
Globe and Mail

Cannabis companies do not have a lot of financing options, so many have concluded risky financing is better than none.
Globe and Mail

Quick Hits

  1. Police in Saint John, New Brunswick, are following Ontario's lead by prosecuting landlords who own properties in which unlicensed REC stores are located.
    CBC New Brunswick

9 CANOPY CLIPS OWN WINGS INSIDE CANADA

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HTTPS://WWW.FLICKR.COM/PHOTOS/48600099091@N01

Canopy has no further plans to expand inside Canada following a brutal $374.6M quarterly loss posted two weeks ago, which CEO Mark Zekulin blamed partly on the lack of REC stores open in Ontario.
Alberta Farm Express, NewsWire, Bloomberg

  • The company is concerned consumers won't show as much interest as predicted in Legalization 2.0 products when they begin appearing next month.
  • However, Canopy says it won't cut jobs—in part because they believe the market is going to improve as soon as more Ontario stores open.
    CBC Ottawa

Quick Hits

  1. Aurora and Canopy published statements distancing themselves from the Cannabis Council of Canada's call for enforcement of unlicensed growers and sellers, calling instead for cannabis convictions expungements.
    Aurora, Canopy, MJ Biz Daily

10 FIRST NATIONS: “OUR CANNABIS IS NOT ILLEGAL”

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BIMAADZWIN / ISADORE DAY

Though Cannabis NB has blamed competition from unlicensed REC sellers for its failing fortunes, former Ontario Regional Chief of the Assembly of First Nations Isadore Day argued First Nations—left out of the Cannabis Act entirely—should not be considered part of the illegal market.
CBC New Brunswick

  • Métis lawyer Jesse Donovan noted, "Indigenous cannabis laws are a legitimate expression of self-determination and can help to address poverty," as he called for Canada and its provinces to harmonize cannabis law with the UN Declaration on the Rights of Indigenous Peoples.
    Twitter—Jesse Donovan

Quick Hits

  1. A consultant warned any private buyer who acquires Cannabis NB to expect losses.
    CBC New Brunswick
  2. During its period of license suspension, Bonify asked shareholders for short-term cash to keep the company from collapsing. Amazingly, Health Canada reinstated Bonify's license in October.
    Winnipeg Free Press