A “limited quantity” of unlicensed cannabis was grown inside a Niagara, Ont. facility that Quebec-based Hexo Corp. acquired from Newstrike Brands Inc. earlier this year, with a “tiny” amount of that pot entering the market, the company’s chief executive said.

In a release late Friday, Hexo said once the company discovered that unlicensed cannabis was being cultivated in “Block B,” a room inside a building formerly owned and operated by Newstrike Brands, it immediately “ceased cultivation and production activities” in the room and notified federal regulators. Hexo acquired Newstrike Brands in March for $263 million.

Hexo said that a site inspection conducted in February by Health Canada prior to the acquisition resulted in no observations or concerns from the regulator about the cannabis grown in the unlicensed “Block B” space. Hexo said that the inspection report “reinforced the assumption that it was indeed a licensed growing space.”

In a phone interview with BNN Bloomberg, Hexo Chief Executive Officer Sebastien St-Louis said the company’s regulatory team discovered the room was growing unlicensed cannabis “a day or two” after it closed its purchase of Newstrike Brands at the end of July. St-Louis said that Health Canada inspectors didn’t catch that the growing room was unlicensed after a regulatory application submitted by Newstrike was apparently lost during a transition to a new software program run by the federal regulator.

Once Hexo’s team noticed a licensing discrepancy at the Niagara facility, the company immediately contacted Health Canada, St-Louis said.

“The minute we were there in operations, we caught it,” he said. “Everybody missed this, including Health Canada.”

In its release, Hexo said that once the unlicensed activity was identified, all inventory at the site was placed on hold and destroyed.

St-Louis said a “limited quantity” of cannabis was grown at the facility, and would provide further details on the amount of unlicensed pot shortly. A “tiny” amount entered the consumer market, he added.

“We went in, we updated our licensing which we do all the time in multiple sites, the regulator says, ‘You’re all good’, there’s no material amount of plants destroyed and no customers affected,” St-Louis said.

Jay Wilgar, the former Newstrike Brands chief executive officer, said in a phone interview with BNN Bloomberg that he was unaware of any cannabis grown in an unlicensed room in its Niagara facility.

“From our perspective, we always operated in a manner that Health Canada was aware of what went on in our facilities, without question,” Wilgar said.

“To be clear, we operated the Niagara facility in a very responsible manner. We were in constant contact with Health Canada so I’m at a bit of a loss where all this is coming from. I think Health Canada had been in our facility multiple times. Our Niagara facility is very open. We were dealing with Health Canada on a regular basis.”

Natalie Mohamed, a Health Canada spokesperson, confirmed the regulator was contacted by Hexo in July 2019 to rectify a situation where the company discovered that "activities with cannabis" took place in the facility which may not have been approved.

"Health Canada assesses each situation on a case-by-case basis, takes into consideration actions taken by licence holders to address any instances of non-compliance, and takes enforcement action, if warranted, to protect public health and safety," Mohamed said in an emailed statement to BNN Bloomberg.

Hexo’s statement comes after CannTrust Holdings Inc. was found to have grown thousands of kilograms of cannabis in unlicensed rooms at its Pelham, Ont.-based facility. As a result of that infraction, Health Canada seized nearly 5,200 kilograms of dried cannabis and the company instituted a voluntary hold on approximately 7,500 kg at another facility.

CannTrust soon afterward fired CEO Peter Aceto with cause, demanded the resignation of chairman Eric Paul and formed a special committee tasked with probing the regulatory scandal. In August, CannTrust said Health Canada found that its Vaughan, Ont. manufacturing facility was non-compliant as well. The federal regulator subsequently suspended CannTrust’s licences to grow and sell licensed cannabis.

Hexo said it is disclosing its unlicensed cultivation after becoming aware that “false information” was being spread to allegedly damage its reputation.

“Hexo felt that it was diligent to ensure factually accurate information was available to its stakeholders,” the company said in a statement.

The company recently shut down its Niagara facility last month after laying off 200 people as part of a cost-cutting move to bring the cannabis producer closer to profitability.

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