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GiveLife.ca

    

PRINT EDITION
CannTrust halts all cannabis sales
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Producer also establishes special committee to investigate alleged illegal growing activities as Health Canada continues probe
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By MARK RENDELL
  
  

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Friday, July 12, 2019 – Page A1

CannTrust Holdings Inc. has halted sales of all cannabis products amid a Health Canada investigation into illegal growing activities that saw the company cultivate thousands of kilograms of marijuana in unlicensed rooms.

In a statement on Thursday evening, the company said that it has implemented a "voluntary hold on sale and shipment of all cannabis products" while Health Canada investigates its manufacturing facility. The announcement comes one day after Ontario and Alberta's provincial wholesalers stopped selling CannTrust products. CannTrust also said Thursday that it has established a special committee composed of "independent members of the board of directors. The purpose of the special committee is to investigate this matter in its entirety."

CannTrust shares have plummeted nearly 40 per cent since Monday, when the company acknowledged that Health Canada issued a noncompliance order to CannTrust for growing cannabis in five unlicensed rooms in its 12room greenhouse in Pelham, Ont., between October, 2018, and March.

CannTrust also acknowledged Monday that employees sent "inaccurate information" to federal regulators. On Wednesday, The Globe and Mail reported allegations from a former employee that CannTrust used fake walls in its unlicensed rooms to cover up illegally grown plants in staged photographs that were sent to Health Canada.

Nick Lalonde, who oversaw disposal operations at the company's greenhouse, told The Globe that CannTrust explicitly misled federal regulators: "We're hanging these poly walls, these white poly walls ... moving tables with hundreds of plants on them out of the camera view, just to snap a picture of the room with nothing in it."

Federal regulators have put a sales freeze on 5,200 kg of cannabis that the company had grown in the five unlicensed rooms.

Prior to the complete halt to sales announced Thursday evening, the company had chosen not to sell an additional 7,500 kg of product that was grown in the unlicensed rooms in the same time period.

With CannTrust stock sinking to its lowest point since October, 2017, Bay Street analysts are now openly questioning whether the company will lose its growing licence, and it faces the possibility that it will be forced to destroy thousands of kilograms of cannabis, worth tens of millions of dollars.

"Clearly, the major concern among investors at this point is whether Health Canada will look to make an example out of CannTrust and potentially pull the company's production licence," Canaccord Genuity Corp.

analyst Derek Dley wrote in a research note published on Thursday, in which he downgraded the company's stock to "hold" from "speculative buy" and cut his target price to $5 from $12.

"While we had originally viewed [a licence suspension] as highly unlikely, we are now acknowledging that this could be within the realm of possibility.

We believe the company will, at a minimum, face a fine and be forced to destroy the 5,200 kilograms of cannabis which were produced in the rooms in question," Mr. Dley wrote.

CannTrust acknowledged on Thursday that a licence suspension was possible.

"We are taking these observances very seriously, and we are working closely with Health Canada and our internal teams to implement new processes and a companywide retraining program, as well as conducting a full internal investigation and preparing a report to the regulator, including mitigating factors," the company said in a statement.

On Wednesday, the Alberta Gaming, Liquor and Cannabis Commission said that it was placing a hold on all "affected lots" from CannTrust, while the Ontario Cannabis Store - the province's wholesaler and online retailer - said it was ending sales of all CannTrust products "pending the outcome of the [Health Canada] investigation."

The company is now in a waiting period while Health Canada conducts "quality checks" on products seized from CannTrust facilities; the process is meant to wrap up on July 17. After that, the federal regulator has a number of options for how to proceed.

"There remains a high degree of uncertainty with respect to the potential for future legal and regulatory repercussions. This includes a possible licence suspension or revocation by the regulator," Eight Capital analyst Graeme Kreindler wrote in a research note on Monday. "According to the Cannabis Act, the regulator may suspend a licence in order to protect public health and safety. The regulator can revoke a licence if the holder has contravened a provision in the act since the licence was issued."

Health Canada has suspended cannabis licences twice before, for the Maple Ridge, B.C.-based grower Agrima Botanicals Corp.

and for Winnipeg-based Bonify Medical Cannabis. For Agrima, whose parent company at the time was Ascent Industries Corp., the company was found to have been selling products into the black market. Bonify, by contrast, was caught sourcing cannabis from the illegal market.

In both cases, there was a period of several months between the initial investigation by Health Canada and an announcement that the federal regulator intended to suspend the licences.

CannTrust's non-compliance order does not appear to pertain to product being diverted into the black market. That fact suggests the company's licence will not be suspended, Royal Bank of Canada analyst Douglas Miehm wrote in a note on Tuesday, in which he cut his price target for CannTrust to $5 from $13.

"The agency has historically suspended licences when [licensed producers] were found to source/divert product from/to an unregulated channel. In our view, the CannTrust situation does not appear as dire as these scenarios," Mr. Miehm wrote.

Whatever happens to the licence, a number of analysts are predicting that CannTrust will be forced to destroy a significant amount of cannabis that was grown in its unlicensed rooms.

According to Mr. Kreindler of Eight Capital, the 12,700 kg being held back from market amounts to roughly 70 per cent of CannTrust's inventory balance, as of its last reported quarter. It also equals roughly four times the company's previous quarter sales.

"Based on last quarter's average net sales price of $5.47/g, we estimate that between $28-million and $69-million in future sales could be at risk," Mr. Kreindler wrote.

The possibility that CannTrust will have to destroy a considerable amount of its product comes at a time when Canadian licensed cannabis producers are struggling to meet market demand for high-quality products.

"Even if the company does retain its licence, at a minimum the credibility of CannTrust has now been put into question; and given that prior to Monday's news of a compliance breach, CannTrust had been viewed as one of the highest-quality companies in the space, we believe that investors are unlikely to reward CannTrust with a premium multiple going forward," Mr.Dley of Canaccord wrote.

Saturday, July 13, 2019
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