The rise and fall of Canada’s cannabis industry

Jordan It was October 17, 2018. Canadians were calling it C-Day. Okay, nobody was calling it that. But as recreational pot became legal in Canada, a lot of people were celebrating. After all, they were getting rich and about to get richer. Retail investments, profits, billions of dollars in marijuana sales, never happened. Today, pot is legal. It’s pretty cheap. The people who want to consume it, and nobody much cares. But while a few thousand early birds and stock hypers got rich, thousands of Canadians lost jobs, lost savings, lost opportunities and livelihoods. Why did it happen this way? Who got what wrong? And how? When large cannabis companies were being valued in the billions, despite having yet to grow a single plant or roll a single joint, what the hell was going on? And the people who did make millions pushing cannabis stocks, what are those people pushing now?

I’m Jordan Heath-Rawlings, this is The Big Story. Omar Mouallem is an author, a filmmaker, and a freelance journalist based in Edmonton. He chronicled the rise and fall of the cannabis industry for Canadian Business. Hey, Omar.

Omar Mouallem Hey, Jordan.

Jordan I want to start with this because the subhead on your story caught me by surprise. So the subhead on your story asks, how did we get weed so wrong? Who’s we in this context?

Omar Mouallem Well, I think that we is probably Canadians in general, whether or not you smoke pot, whether or not you were going to be a recreational cannabis consumer. I think in general, Canadians love the idea that we were going to be, as we were told, as promised world leaders in this space. That was sort of the narrative. And it wasn’t just perpetuated within Canada by Canadians and Canadian media. You saw it internationally as well. I mean, The Guardian, New York Times, a lot of them perpetuated this narrative that Canada was on the leading edge, that they were going to be the world leaders of the cannabis industry. We were, as The New York Times said, allegedly calling it C-Day when cannabis was legalized. I don’t know if that really bore out because we are definitely not consuming cannabis to the volume that it is being produced. And as far as the value of the industry goes, it really has collapsed from the peak that it was in 2018, early 2019.

Jordan Take us back, if you could, to 2018, to the few months leading up to legalization. How were cannabis companies valued? Who was buying the stock? Give us a sense of the optimism that must have been around the industry and the money that came with that.

Omar Mouallem So it is hard to know exactly how these companies were valued because even before the parameters of the industry were known and even when some of them were known, like the fact that there would not be an opportunity to export Canadian cannabis internationally, a lot of these companies had $100 million, even billion dollar valuations. I think quite simply, they were valued on their stories and the stories that they told. The bigger the story, the more extravagant it was, the more investors that they attracted early on, the kind of stock investors that could pump your valuation to the hundreds of millions or billions so that you can go on these big building sprees. And these giant behemoth greenhouses that were built are also, I think, part of the reason that they got these behemoth evaluations as well. I think really quite simply, the better and bigger the story they told, the bigger that company often would become, at least in the short term.

Jordan What kinds of projections were made about how much pot Canadians would actually consume, whether via oil, edible, smoking, et cetera? Because clearly the projections were nowhere near right. So how did that happen?

Omar Mouallem I think we got it wrong because I think we wanted to believe that this could be this overnight industry that would put Canada on the world stage. And I think also there was just a lot of boosterism from within the financial Echo Chambers. You have stock promoters whose job it is to hype up certain stock opportunities. And when there is one that doesn’t have a lot of precedent, part of you thinks that this should actually cause more hesitation, but often it does the opposite. It causes excitement because there is no precedent. You can’t really fact check it. You can’t fact check what people sell you on. As one of the people I interviewed, Scott Willis, this independent analyst, said it’s easier to sell a dream than it is to sell reality. And I think that’s what happened there.

And a lot of it also has to do with this assumption that the black market was going to come online. But there were so many obstacles in front of people in the black market to come out of it and come into the legal market that in the end, the market just became bifurcated into both legal and illicit.

Jordan What I really enjoyed about your piece is the human face it presented to the boundless optimism of this industry because like I said, I remember that time everybody was getting into the business or buying stock in the business or getting excited to consume what the business produced. And a lot of these people got hosed. So maybe just tell us about Jennifer Danyluk. Who is she? How did she end up in the cannabis industry?

Omar Mouallem Yeah, a lot of people did get hosed, and she is like many people that I spoke to, but she is actually the only one who was willing to put herself out there and go on the record as someone who was a casualty of the cannabis hype. So who is Jennifer? In a lot of ways, she’s just kind of your middle aged Albertan woman. She moved here during the oil boom of the mid 2000s from the Maritimes as tens of thousands of people did. She worked in the energy sector for quite a while, first as an accountant, then as a controller, really worked herself up there. But then the oil market crashed in around 2014, 2015, and her and her family were in some pretty big financial trouble. And so she was looking to get out of the energy sector. And along comes a job recruiter, a headhunter from the cannabis industry from a company called Radient.

So it’s not a new company. It didn’t start as a cannabis company. It was founded in Edmonton in 2001 as a pharmaceutical company and as an extract company. But things didn’t really work out. It ended up being like a boutique producer of cosmetic oils and natural health products. But it did have these two major assets that would later attract a giant of the cannabis industry. And those assets where it had this extraction technology that would allow it, at least in theory, to produce the largest amount and the cheapest amount of THC oil extract per day. And it also had this massive underused almost 2000 sq meter processing plant. So this attracts Aurora cannabis. That’s the Behemoth company, which is also in Edmonton that I was talking about. And they’ve grown massive with billions of dollars of stock capital and were on this aggressive buying spree. And so it began to talk about a deal with Radient Technologies, hoping that Radient could apply its technology to cannabis. And it caused a lot of excitement for Radient. It went from being a Penny stock to suddenly having a market cap of almost $100 million, only because it started to enter negotiations with Aurora.

Then Aurora put in a $14 million investment and it signed a five year agreement with Radient to process cannabis biomass into cannabinoid extract. And within a month of announcing that deal, Radient’s market cap more than doubled to $228,000,000. And this is a company that, by Jennifer’s account, had maybe less than a dozen employees. It was very scientist led. So when she is headhunted, she’s basically walking into almost an empty space. As she recalls it, there were the lead scientists, CEO, herself, and a receptionist. And they had to basically build this company from scratch with having never actually produced anything yet. They had no proof of concept.

Jordan And this is because of their association with Aurora. So how did Aurora become such a giant in the industry? They’re one of the giants you mentioned earlier, you also said that it depends on the story you tell. What was their story? How did they do it?

Omar Mouallem Well, they started with a very humble story actually, as a medical company that in fact began as a small grower’s personal project to help his friend who had cancer treat his illness. And it grew with some years to be a modest medical company with the help of some key investors and experienced entrepreneurs. And one of them is this Edmonton man, this former electrician turned entrepreneur named Terry Booth. And Terry’s a big, big dreamer. And he’s a big personality as well. And he always had his eye on recreational cannabis, probably from that first medical investment, and always had big ambitions for it. As the road to legalization began, Aurora wasn’t growing, I think, as fast or as big as it hoped to, at least not compared to Canopy and Tweed, which are the two top cannabis giants which were blowing up at the time. But then their valuation started to look kind of bloated, and stock promoters were looking for a new Darling in the Canadian cannabis space. And Fortuitously Aurora had just announced this big, ambitious greenhouse. I mean, Big is an understatement. It was a 70,000 square meter, state of the art greenhouse that, if completed, would become the world’s biggest marijuana facility. And that’s how it stole the investor spotlight.

And so, a year before legalization, Aurora now had a nearly $2 billion market cap. And with that capital, it wasted no time breaking ground on Aurora Sky, but then started making plans for other greenhouse operations, some that were even bigger, like Aurora Air, Aurora Polaris, Aurora Sun, and even a Danish expansion called Aurora Nordic. And this, of course, is all while they are aggressively spending on other companies that it would either buy outright or take a major stake in for some influence. Often it seems simply to take some marginally promising technology out of the competitors hands. And at its peak, Aurora was worth over $4 billion.

Jordan I want to get you back to Radient and its association, and particularly what happened with Jennifer in a second. But first, I have to ask, can we compare this maybe to other emerging industries? How common is it in new industries for this much money to be given to companies who haven’t even broken ground, who haven’t made anything, and who certainly haven’t sold a single thing? Like, how unprecedented was this?

Omar Mouallem I don’t know if it’s unprecedented. I mean, it’s pretty unusual, right? Like these companies were making projections before there were even any parameters around how this industry would be regulated and how it would work were even announced or known. So a lot of their actual decisions were being made blindfolded. But I think there are plenty of comparisons in tech or if you want to go back to the dot com bubble. But I think maybe a couple of recent examples might be something like Quibi which was kind of untested. There was very little evidence to think that people would want Netflix for their Bus Commute. Or Truth Social. There has never been a successful partisan social media compared to Twitter. Because we actually need our enemies in order to have an enjoyable time on social media, apparently.

I think what’s different here is that in theory, cannabis is a type of commodity, but it was never treated that way. It was treated as equity. So it attracted a lot of people, I think, trying to make a quick buck. And those who could afford to get in super early, they did, but they are a small minority and they got out fast. A lot of them, I understand, are now taking an interest in psychedelics.

Jordan When did it start to become clear? Now, let’s say we’ve passed October 2018 when it became legal. Everybody’s waiting for the money. When did it start to become clear that a lot of the value in the industry was simply theoretical and was not going to become a $5 billion business?

Omar Mouallem So right off the bat, it was apparent that the illicit market was going to be a lot harder to outdo than people had given it credit for. And the first quarter of sales after C-Day, October 2018, showed abysmal sales in the legal market and a lot of red tape and just struggles to get companies up, to get stores up, to figure out what the legal frameworks were going to be. I think all of that regulatory stuff people understood would eventually be ironed out. And maybe that’s one of the reasons why investors didn’t go running after that first abysmal quarter. They were largely forgiven. But then the second earnings report came in around spring 2019 for companies, and that’s what sent them running. And it took Canadian Pot stocks down with them. That’s when you see the country’s largest growers like Canopy and Aurora, that’s when you see their stock values just plummet. Their shares dropped by a third by the end of the summer of 2019. And that was pretty much across the board. Big companies and small companies. Small companies might have even had it worse.

Jordan So, yeah, what happened to those small companies like Radient? How did it do after its partnership with Aurora and trying to introduce its new technology to a whole new substance? At the same time as the market is not bearing out the profits?

Omar Mouallem Well, they didn’t have the same cushion that a company like Aurora would have. So the crash was probably felt more by companies like Radient. Radient actually had two quarters without revenue. I kid you not $0, because as Legalization Day approached and remember, it had converted all its entire extract processing plant to THC extractions. As Legalization Day approached, it still couldn’t get bulk THC extractions to work. So the company only had an RND license and it was still trying to get permission to process. This comes back to all those legal loopholes, those regulatory loopholes that were in place. Before you could even apply for a license, you had to pretty much have it set up for production. It wasn’t able to get ready in time for C-Day.

And in the meantime, Aurora couldn’t wait. So it starts doing its own extractions using some smaller extraction rigs that it has, which the quality of it turns out to be pretty good, but more importantly, better than what’s coming out from Radient. So Radient, I mentioned earlier, was a very scientist led team. And as a result of that, they had no experience with THC. And their promise was just a theory. The numbers they crunched about how much it would cost to produce this, was only a theory. And so it starts coming out. And according to my sources at both Aurora and Radient, it’s discolored, it’s pungent, and most importantly, it’s weak. They’re producing THC oil at about 3 to 6% concentrate. Nobody wants that. There’s almost no market for microdosing cannabis. People microdose other drugs, but not cannabis. And so it’s looking pretty bad for Radient from the start. And very quickly, its price starts plummeting back to where it began, which was as a Penny stock.

Jordan So what did Aurora do with Radient after it kind of became clear this wasn’t going to pan out?

Omar Mouallem Well, according to a class action case against both Aurora and Radient, right now, Aurora tried to make Radient useful by using it possibly to fluff up its financials. So according to the allegations in this suit, Aurora sold more than $21 million of dried wholesale cannabis to Radient, a company that it had a lot of ownership and influence over. And then it reported that wholesale to investors as one of the bright spots in its quarterly earnings, in its year end earnings, to try to get the stock price back up. And it did help for a little while, I guess. But you have to remember, this is pretty weird because Radient had only made $60,000 in revenue. It was never in the business of producing its own cannabis stock because it’s a service provider, in theory. The price that it bought it for was somewhat inflated in and of itself. And according to experts, this purchase was made by Radient at a time when it was in huge financial trouble. It couldn’t even pay its overhead bills, like on forklift rentals.

So this gets starts to get attention when Radient sells this cannabis back to Aurora over the next few months. And as people take note of this, it might be evidence of a round trip sale or Boomerang sale, as it’s sometimes called, which is when one company sells assets to another that it has influence over to falsely inflate its revenues and then later buys back the assets.

Jordan And just to be clear, none of this has been proven in court. This is what the class action alleges and did Radient and Aurora deny it?

Omar Mouallem That’s correct. I did not actually get a response from Radient. Aurora does deny it. Radient is not a defendant in the suit. Only Aurora and some of its executives and former executives are. But that’s correct. They do deny any wrongdoing.

Jordan So in the end, what happened to Radient in particular, what happened to Jennifer? This is a woman who already sort of watched one industry bottom out and found herself in the cannabis industry. And now the bottom has fallen out of that one.

Omar Mouallem What’s funny is she became a true cannabis believer, almost an evangelist. And she was someone who, before her job, had never smoked pot before, not even, like at a high school party. She became a big champion of it. She invested a lot of her wages in Radient stock and put some of her own money into Aurora stock. She even started growing her own plants at her parents farm as well, and convinced her mother to start taking cannabis extracts for her insomnia. So she was really in it. And so when things started to fall apart, she did what true believers do, which is, I think they try to hold on for as long as they can. And she tried to keep it together through the massive layoffs at Radient, tried to pick up the slack of those lost jobs. She took a major wage cut, just as she had when she worked in the energy industry less than a decade prior. And the whole thing, this is all happening largely because of an oversupply of cannabis that can’t possibly meet market needs. So this is really like deja vu for her.

And as she tries to keep it together, hold on to her job, help the company survive, her marriage falls apart, and then her health begins to deteriorate. And she was hospitalized in October 2020 due to a bacterial infection that her exhausted immune system couldn’t fend off. And that was the last straw for her. That was when she finally decided to leave, not just leave Radient, but leave the industry entirely. And before she had even recovered, she was looking for new work. And so now she is a chief financial officer working in the trucking sector.

Jordan I’m glad she has a happy ending, but how many people were in similar situations? Because I know, again, everybody and their brother was getting scooped up by cannabis companies four years ago. How many of them still work in the industry?

Omar Mouallem Well, roughly one third of the cannabis workforce has been wiped out since April 2020. So there’s that. A lot of the retail investors, a lot of them lost a lot of money. I’ve heard some pretty tragic stories of farmers who had bought into this dream, converted their tomato and pepper plants over to cannabis, and they got burned from that investment. I talked to employees who didn’t want to go on the record of cannabis companies who also invested as much of their wages into company stocks, up to 10% of their wages, sometimes more, and watched the value of that investment just evaporate. So I think it’s a tragic story for a lot of people. But the people who got in very early on, I think there’s been almost no consequences for them, no accountability. Like I said, a lot of them aren’t even in the cannabis industry anymore. They’ve moved on to psychedelics or to crypto.

There has been an 80% turnaround in leadership at these cannabis companies in Canada. The CEOs, 80% of them that were there on C-Day are no longer there on D-Day, whatever we’re going to call it. And where have many of them gone? They’ve gone to the American cannabis industry, so they’re basically trying to make their way into a cannabis industry that so far has more promise and is trying to learn a lot of lessons from the mistakes that Canada made in cannabis.

Jordan Omar, thank you so much for this.

Omar Mouallem Thank you. It’s been a pleasure.

Jordan Omar Mouallem writing in Canadian Business and doing more than anybody else in this country to codify the term C-Day. The New York Times can thank him later. That was the Big Story. For more from us, head to thebigstorypodcast.ca. Talk to us anytime on Twitter @TheBigStoryFPN or via email, Hello@thebigstorypodcast.ca [click here!].

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