The Alcohol and Gaming Commission of Ontario warned pot shops on Monday that it has uncovered instances of retailers selling products that violate their license terms, in a letter obtained by The Canadian Press.

“The AGCO has learned that some cannabis licensees are offering and selling cannabis-based products, like lotions, edibles, topicals, etc., that have not been purchased from the Ontario Cannabis Store (OCS),” the regulator wrote in the letter.

The OCS is the provincial pot distributor for Ontario.

“We also have become aware that some retailers are offering and selling cannabis-based products in different packaging than the original packaging from the OCS.”

Ontario’s licensed cannabis stores are only allowed to sell pot and hemp products purchased from the OCS, and must keep the items in their original packaging.

Hemp products have low or trace amounts of THC, the active ingredient in marijuana.

AGCO spokesperson Raymond Kahnert said in an email that the message was prompted by compliance officials who became aware of hemp-based products being offered for sale at two cannabis stores in the southwestern region of the province.

The AGCO considers items derived through hemp, such as lotions and oils, to be cannabis products, which retailers must buy from the OCS.

The products that compliance officers uncovered had not been purchased from the OCS and both retailers immediately stopped selling the items following discussions, Kahnert said.

Jennawae McLean, the co-founder of Kingston, Ont. cannabis store chain Calyx + Trichomes, said she had to pick her “jaw up off the floor,” when the AGCO’s letter was sent out to pot shop owners.

She has never heard of or seen a licensed cannabis store selling unregulated goods.

“I’m completely shocked that anybody would do either of these things so brazenly,” she said.

“It’s pretty bold, openly breaks the law and the regulations and jeopardizes your livelihood. It’s completely bananas.”

The Ministry of Public Safety and Solicitor General announced today that private pot shops can immediately begin selling ancillary items that have a clear link to cannabis.

The ministry says that includes books, clothing or artwork featuring cannabis motifs, but does not extend to snacks and beverages that do not contain cannabis.

The new items must not be geared toward or appeal to minors and cannot depict cannabis as a lifestyle associated with glamour, recreation, excitement, vitality, risk or daring behaviour.

The ministry says the new policy is meant to provide customers with more choice and legal cannabis sellers with additional revenue streams.

Stores could previously only sell cannabis, accessories like rolling papers and pipes, shopping bags and prepaid purchase cards.

“Many of our customers have a strong interest in peripheral items related to cannabis culture, like clothing,” said Jaclynn Pehota, executive director of the Association of Canadian Cannabis Retailers.

“We welcome the freedom to meet this demand and provide our customers with more of a one-stop shopping experience.”

The Ontario Cannabis Store said in its second-quarter report released this week that 54.2 per cent of the pot purchases made in the province between July and September were linked to legal retailers.

The figure is based on self-reported data that Statistics Canada collects from marijuana consumers, who may under-report purchases made in the illicit market because of the stigma cannabis still carries.

However, it suggests the cannabis market is at or nearing a long-awaited turning point after the legal industry spent the last three years slashing prices to compete with the illicit market and police raided a series of unlicensed dispensaries.

“When it comes to the unregulated market, (sales) are a difficult number to pinpoint, but assuming the reporting is true, it’s not hard to believe,” said Jennawae McLean, the co-founder of Calyx + Trichomes, a cannabis store chain in Kingston, Ont.

“The number of stores in Ontario has grown exponentially over the last … two years. It’s really just completely exploded.”

The number of cannabis stores in Ontario soared to 1,115 in recent months, compared with 183 at the same time last year and 53 two years ago.

When recreational cannabis was legalized in 2018, the legal market was responsible for only 5.4 per cent of pot purchases, but that number grew to 19 per cent at the end of 2019 and 44.1 per cent at the end of 2020.

Now, the OCS says sales made through legal channels totalled $394 million in the second quarter, up from $204.3 million at the same time last year.

The most recent quarter’s sales amounted to a record 56 million grams of cannabis.

McLean partially attributes that all-time high to the increasing number of cannabis stores that have made pot easier to access, but said legal channels are also attracting sales as customers realize how much is on offer.

“Yesterday I was working at one of my stores and I had this guy come in, and he was overwhelmed with the size of our menu, which, to be fair, is 27 pages long,” she said.

“He had no idea where to even start and he said that was because since he started smoking cannabis, he got it from a guy and didn’t know what it was or what was available.”

Cannabis stores in the most recent quarter had 1,842 products on offer, including 389 that had just been added, said the OCS.

The product categories generating the most sales were dried flower, vapes and pre-rolls, while beverages, capsules, topicals and seeds were responsible for the fewest sales.