Governance Issues At Canopy And CannTrust


  • Big questions cannabis investors need to be asking.
  • Hidden rooms and pesticides.
  • Canopy can be added to watch lists for the future.


What really is happening in the cannabis industry?

This article is not about a particular investment thesis of CannTrust Holdings (CTST) and Canopy Growth (CGC) but about how these two companies can illuminate big picture industry problems and governance issues.

Our understanding is that there is a world of problems being covered up in the cannabis industry today and so investors must be especially cautious. Getting informative answers to the right questions will lead, we believe, to a mind-blowing expose of how government is entangled in a top-down power struggle to manage and control the cannabis industry to the benefit of well-connected associates.

Due diligence must be done before investing hard-earned money. Moreover, the Securities Act of 1933 requires corporations and the army of their sales and marketing agents who sell securities to fully disclose material facts on a timely basis to assist investors in the due diligence process. When it comes to cannabis, the due diligence is sadly lacking.

As professional investors, we believe the industry has come too far on excess speculation. There are just a small list of attractive cannabis companies that we would buy as speculative investments, but only after a significant price retreat. As possibilities, CGC is on the list and CTST is not. These companies are on different trajectories.

Notwithstanding management changes, CGC has the growth and earning power as well as the financial backing to remain a market leader. However, the company is unlikely to reach the earnings reported this week by competitor Aphria (OTC:APHA) until after management addresses industry write-offs and disposals of subsidiaries that are no longer core assets. Unfortunately, CTST is likely a goner because of class action lawsuits. A strong competitor is likely to offer the courts a fair asset buyout that would leave shareholders little to nothing.

What are the key questions to ask about the CGC and CTST debacles?

Shortly after the world’s largest cannabis industry company, Canopy Growth, fired its chairman and co-CEO, Bruce Linton was interviewed on CNBC. Linton said from his home in Ottawa, “The one thing I won’t be doing is going back into cannabis in Canada.” That’s a profound statement from perhaps the industry’s most knowledgeable player; but who was asking why.

Regarding the CannTrust fiasco that started a few days after the Linton firing, who is asking the question, why would a supposedly high-end Licensed Producer (LP), one that operates in many countries, under supposedly the strictest regulatory supervision, be running an extensive unlicensed and hidden cannabis growing operation?

Opening a Can of Worms

Canada was the first country in the world to pass federal and provincial legislation approving both medical and recreational use marijuana, now called cannabis. There is much controversy in the House of Parliament in Ottawa as to links between Canada’s Prime Minister Justin Trudeau and former key people in his Liberal Party, both nationally and from his Province of Quebec. The Prime Minister refuses to answer questions put to him in the House by the parties in opposition who seem to have knowledge that there are links to his friends and associates with licensing and regulatory favoritism as well as offshore funding from jurisdictions like Cayman Islands.

An emerging industry that started allegedly from a basis of corruption is only the backdrop to why the tough questions are not being asked today regarding Canopy Growth, CannTrust and many other industry players. Top-down political power that is reinforced and sustained by the country’s obliging legal and accounting professions, stock exchanges and promotional media that is raking in big money is at the crux of the matter.

What has developed among players of this level is a web of seeming propriety, supported by policemen-led cannabis start-ups and costly policing of unlicensed retail operations, all encouraged by government to assure the voting public that cannabis is a non-corrupt business. It is in fact corrupt and that subversion has ultimately driven legal operators to under-perform.

The issue is a rather simple one, which is to say that bad quality products, priced exorbitantly, cannot unnaturally, i.e., by government decree, be forced upon a sophisticated consumer without a black market existing.

Licensing under Health Canada, the public heath agency of the federal government, which is now called Access to Cannabis for Medical Purposes Regulation (ACMPR), has already been gamed by corrupt individuals and organizations. So, w hat is happening on the legal front today is that an ACMPR- Licensed Producer (LP) are operating at a disadvantage to illicit grey/black market participants. They are losing, and some of them are fighting back against what they see as unfair regulation. Some too are getting caught in such efforts. They are also failing to meet the lofty expectations established by their own ubiquitous hype.

So, many sides are at fault.

Who Is Winning Canada’s Marketplace War, And Why?

There is a difference between modern day carpetbaggers and the industry scientists and growers who will ultimately be the winners. Media in Canada points to various so-called moguls as the pioneers. We believe these individuals are the ones who with political and money connections have parlayed their efforts into great personal fortunes for friends and family, but at the same time have caused most investors other than the early risk-takers to lose a lot of money, particularly in the past six months as due diligence has discovered the huge gap between their stories and the truth.

The true pioneers are to be found in the illicit grey/black market who in time we believe will save the cannabis industry from politicians who were quick to exploit it but now driving it into the ground in order to keep profiting.

Anyone in Canada who is a true medical client or one who is not but who offers to pay an allegedly crooked doctor up to $5,000 for a prescription as a so-called medical client, can acquire a Health Canada ACMPR license to grow 250 to 350 plants. There is even an industry that advertises services as to how one can quickly obtain this supposedly personal license.

With the help of a small network of associates, individuals can easily group together cultivation licenses to form a business. Now with say 1200 legal plants, grown with the highest quality unregistered cannabis strains and with the help of agricultural chemicals including toxic ones, these licensees are mass producing genetically superior Christmas trees laden with product of superior quality, at substantially lower costs than LP costs. That product is then sold and delivered illegally to a sophisticated market. We call this the grey market (part legal, part illegal), which is mostly a medical cannabis game. If not discovered by the authorities, a single underground operation can produce eight figure revenue and immense profits.

The similarly well-organized black market does not typically play in the crooked end of the medical cannabis market but within opportunities presented in the recreational market. This is even more profitable because there are more customers and more totally unlicensed operators. According to our sources, there are many of these $100 million operators in business across Canada and the U.S. They stick to high-powered THC and have developed the market’s best strains, which they keep unregistered and secret. Like grey market growers, they use pesticides, grow crops in a more tightly controlled environment that they manage well through more experience, to ultimately produce superior products at less cost to the consumer.

Then there are the very small home growers of cannabis, the fully legal growers, i.e., those who are not operating an illicit business. In total numbers, these people are no more serious competition to the major legal and illegal consumer markets than say are people who make their own wine and beer.

As the many Canadians know, Licensed Producers sell inferior products at outrageous prices due in large part to draconian regulations of Health Canada, including its no pesticides/fungicides protocol and its tight control of cannabis strains. Due to large-scale cultivation environments, greenhouses are particularly affected by humidity dumps so that much of an LP’s crop is often found ridden with spider mites, powdery mildew and mold. Therefore; these secret rooms are most likely being set up to use somewhat controversial chemical products like Nova (fungicide) and Avid and Floramite (pesticides).

Why did Canopy Growth Fire Bruce Linton?

Among LPs, including the biggest and best managed, only a few have attained profitability, which has resulted in a massive market sell-off this year as investors came to realize the enormous gap between hype and reality.

A year ago, one of the world’s largest producers of beer and wine, Constellation Brands Inc (STZ), invested $4 billion to acquire virtual control of Canopy Growth, the world’s largest integrated cannabis company. Management was under the gun to produce profit and when it soon became apparent that Canopy Growth would not become an accretive acquisition, the Constellation CEO stepped down. A year into the deal, for profit concerns Constellation pushed out Bruce Linton, the Canopy chairman and co-CEO.

The Canadian cannabis industry does not want to hear the ‘must be profitable’ message being delivered by knowledgeable corporate and institutional investors. Too many inquiries would result in embarrassing disclosures, great loss of legal, accounting and banking fees and probably many ugly class-action lawsuits by investors who have been taken to the cleaners. Governments could fall. Executives could be terminated. Management and directors’ options wasted. Expect them to push back in a self-preservation mode, and they are.

The benefit of opening this can of worms is that capital market demands for profits and full disclosure will be met.

Why Was CannTrust Operating Hidden Grow Rooms?

Without verification, we cannot be 100% certain. For this article, we tried unsuccessfully to reach the CannTrust whistleblower, a young fellow by the name of Nick Lalonde who presumably lives near the CannTrust facility in Pelham Ontario, just a few miles from the U.S. border at Buffalo. We also tried without success to reach other parties who might know. However, some of the most knowledgeable people and closest to the center of the industry in Ontario who we contacted did express their beliefs, which we used as the basis of this article.

What we do know is that an LP’s genetics must be registered, and it is possible that in trying to compete against the grey/black market, an LP would be under pressure to produce superior quality and may turn to unregistered genetics. We also know that CannTrust prides itself on winning the most consumer awards for high quality. There is a suspicion as to how they did it. CannTrust may also have hidden the rooms apart from legal product and away from security cameras in order to spray chemicals used by grey/black operators that are forbidden by Health Canada.

So, there are three possible answers to the question why CannTrust operated secretly: (1) There were black market genetics in those rooms. (2) Like every great cannabis grower does, they sprayed in veg. Veg is the stage of growing before the flowers (nugs) have formed. (3) They used black market genetics AND they sprayed.

Otherwise, as we see it, there is no reason to hide a room from Health Canada inspectors.

So, Canntrust this month is the big fish that got caught for some reason not yet proven. Other LPs have been caught for spraying, including Tilray a few years ago. Our sources say the problem is much bigger than CannTrust, because this is an industry’s fight for survival.

The Next Shoe To Drop

We question why, in the face of seeming exorbitant consumer demand, so many LPs have an inventory problem. Our sources believe that many companies must write off supposedly valuable inventory due to its having been irradiated into unsalable bunk. Some of their worst quality cannabis may have been pre-rolled, which is also not selling well.

In total the industry write-off figure in Canada alone may be at least $1 billion and is believed to be a fast-growing problem that will come to light this year. When it does, the shareholders of these companies can expect to lose tremendous market value. A simple check of inventory-to-sales ratio might help. Then again, investors should already know that if demand is so much greater than supply as they were led to believe, then there should be no inventory issue.

Solving The Cannabis Debacle Is Potentially Simple

First, all industry stakeholders must understand that Canada’s first mover advantage in the world has been wasted. It no longer exists. Should Canada want to maintain any part of that country’s early leadership as it relates to cannabis they should try to excel in areas of corporate governance and of science and technology.

Next, all countries should terminate their over-regulation folly and champion free markets. Recognize that because of their additional growing seasons and less costly labour, Third World countries like Colombia and perhaps Jamaica that are close to the equator will always produce cannabis at the lowest cost. So, why fight this when the product could be imported.

Finally, put all market competitors in the same boat. Start by recognizing that cannabis is not at all like other FDA Schedule 1 drugs such as heroin and meth or Schedule 2 opiates. Cannabis does not kill people. Never has.

Global regulations should treat cannabis as no different than hemp or any other agricultural product. Allow any interested party to grow and sell cannabis like they would fruits and vegetables, with their free choice of strains and with regulated chemical spraying permitted and tested like all agriculture is today. Let the free market producer and consumer decide. Heavily regulate the cannabis extractor companies that produce potentially dangerous products.

Recognize that the basic issue with cannabis is one of treasury and not health; so, require all producers to charge and remit a value added tax. And, apply tariffs on imported cannabis products.

Meanwhile, government agencies need to redirect their efforts to an all-out war on opiates, which is the serious public health fight we need them engaged in.

Final Thoughts

Some readers will question us as to how much fact underlies the allegations being made by some of the industry players we know. Although we have studied the matter in detail, we still don’t have all the answers, but it is important to determine the truth no matter how controversial that may be in some quarters. We do believe that some people in regulatory agencies and offending corporations know at least some of the truth and that facts could be disclosed by whistleblowers like Mr. Lalonde did with CannTrust. That would be a start.

Regarding our policy proposal to free cannabis markets from government control and manipulation, we understand it would find much opposition. However, the result of such a plan would be to create a level playing field across the world for all cannabis players, not merely the politically connected. We want to see the meritorious succeed and consumers and taxpayers to be the winners. Moreover, because cannabis is the world’s fastest growing industry today, adoption of this proposal would also be a win for participant up-start companies and for the free capital market, which ought to be of interest to all of us.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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