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Federal regulators have given Hexo Corp. a pass on unlicensed growing activity, suggesting that the regulatory failure in a newly acquired facility was due, at least in part, to problems with Health Canada’s licensing and inspection system.

The system has been under enormous strain over the past year, due to an increasing number of licenses, a backlog of applications and a move to the online-based Cannabis Tracking and Licencing System (CTLS), said David Hyde, a security and regulatory consultant.

This has led to slip-ups by both Health Canada and licensed producers, and may explain what happened at Hexo, said Mr. Hyde, CEO of consulting firm Hyde Advisory.

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"I'm not saying it excuses the LP, but it does add a little bit of clarity to the overall context. I think the public and other people are missing the fact that it's devilishly hard to navigate the CTLS," Mr. Hyde said.

On Friday, Hexo announced in a news release that cultivation had taken place in an unlicensed section of a greenhouse in Beamsville, Ont., which the company acquired from Newstrike Brands Ltd. in May.

Hexo said that Newstrike had applied for a license amendment to permit cultivation in a section of the greenhouse known as “Block B” in the fall of 2018, and that Newstrike believed the amendment had been granted. This belief was reinforced when Health Canada inspectors visited Block B in February 2019 and did not comment on plants growing in the area, Hexo said.

Hexo said that it only discovered Block B was not licensed in late July, two months after acquiring the facility, and that it immediately stopped production and informed Health Canada. The company did not respond to multiple requests for comment.

Hexo’s account of the situation seems to have satisfied Health Canada, and “the actions taken by HEXO to rectify the situation were acceptable,” said department spokeswoman Tammy Jarbeau.

It’s unclear, however, how Newstrike, Hexo and Health Canada inspectors all managed to miss the fact that Block B was not licensed.

The situation, according to Mr. Hyde, is not unusual, and it highlights the regulatory confusion caused by the introduction of the new online licencing system.

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Mr. Hyde said he does not have any insight into Hexo’s particular situation – he said he’s never worked for Hexo and he only worked for Newstrike on its older Brantford facility. In general, however, both companies and inspectors have been running into problems with the CTLS, he said.

"The lack of visibility into the CTLS, the overall confusion, all the changes that have been occurring, the amendment process being slowed down, there's many things that could lead you to make a mistake like that," he said.

Once an LP submits an amendment application into the CTLS, the company gets locked out of large sections of the online system. The lock-out was designed to limit the number of amendments an LP could submit at once, said Mr. Hyde, but he added that it’s had the knock on effect of making it less clear what amendments have been approved.

Companies still receive written communication when an amendment goes through. However, the amendments are no longer listed on the license itself, as was the case under the ACMPR.

“That introduces two possible points of failure: one you misread the letter they sent you and you thought that Health Canada was talking about these rooms when in actual fact they were talking about those rooms. Or because of a breakdown in communication, they may not give you the absolutely ironclad correct frame of reference, and you may think that they mean area A, but they actually mean area B,” Mr. Hyde said.

Any lack of clarity could also undermine the work of inspectors, Mr. Hyde said.

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"The inspectors always could go back to the home office and look up these things if they wanted to. I think that sometimes they just saw a beautiful, shiny room that they assumed was ready to go. And the LP made an assumption because the inspector walked through and didn't say a lot about it,” Mr. Hyde said.

Sherry Boodram, CEO of consulting firm CannDelta Inc. and a former Health Canada inspector, was less sympathetic to the idea that inspectors could easily make mistakes about what is and is not licensed.

“You'd always get a pre-inspection package from Ottawa, which is essentially if there's any new information, you've had new personnel that got security cleared, or if there's any amendments in queue, or if they've added anything to the licence, that's all put into a package from Ottawa and sent to the inspector,” she said.

“Then when you get to the facility you have an introductory meeting, so you should also confirm things such as the licence, if they have any amendments that are pending or amendments that have been approved or any notifications,” she added.

She did say that Health Canada inspectors tend to go easier on companies that already have licences because they’ve built up a history of compliance. “That's probably somewhat strategic on Health Canada's part because they do need to delegate their resources efficiently," she said.

Ms. Jarbeau of Health Canada confirmed this approach: “The Department takes a risk-based approach to inspections, which takes into consideration factors such as the complexity of licensed activities, the licence holder’s previous compliance history, and public complaints.”

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Neither Mr. Hyde nor Ms. Boodram said they knew enough about the Hexo situation to assign blame. That said Mr. Hyde did offer some advice to LPs wanting to avoid the embarrassing admission Hexo was forced to make last Friday.

“Make no assumptions. And every time you get an amendment, you should be writing in to Health Canada and getting them to give you a written confirmation. As in 'I’m writing to you as a responsible person for LP A. You’ve given me this communication which I’m attaching here. I want you to confirm that you have approved me to do X in this room, and here’s the floor plan, I’ve marked off the rooms for you,’” he said.

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