This morning, shares of Canadian cannabis company CannTrust Holdings Inc. (TSX:TRST) (NYSE:CTST) are trading down over 27% to under $2.40 USD per share, down big from the stock’s 52-week high of $11.97.
What Happened to CannTrust Stock?
Not long ago, in late June, things were going just fine for CannTrust.
June was a month of big wins for the Canadian licensed producer, with the establishment of U.S. operations in the hemp industry, a successful first shipment of capsule and dry flower products to Australia, and more.
Beacon Securities gave shares of CannTrust a buy rating and a $15.00 CAD per share to boot, and, even BMO Capital analyst Tamy Chen upgraded her rating on CannTrust to Outperform and an $11.00 CAD per share price target.
Then, on July 8th, things took a turn for the worse when it was announced that Health Canada had delivered a compliance report to CannTrust Holdings.
Health Canada’s Initial Findings
The initial non-compliant rating was based on observations by the regulator at its greenhouse facility in Pelham, Ontario regarding the growing of cannabis in five unlicensed rooms and inaccurate information provided to the regulator by CannTrust employees.
Growing in unlicensed rooms took place from October 2018 to March 2019 during which time CannTrust had pending applications for these rooms with Health Canada.
While these rooms were constructed in accordance with regulations and Good Production Practices, and licenses were eventually issued for each of the five rooms in April 2019, this was still a bad move.
As a result, Health Canada placed a hold on inventory which includes approximately 5,200kg of dried cannabis that was harvested in the previously unlicensed rooms in Pelham, until it deems that the company is compliant with regulations.
In addition, CannTrust instituted a voluntary hold of approximately 7,500kg of dried cannabis equivalent at its Vaughan manufacturing facility that was produced in the previously unlicensed rooms.
Following the news, shares of CannTrust plummeted.
Then, triggered by the news, BMO Capital and Roth Capital analysts both downgraded shares of CannTrust, sending shares down even further.
As if that wasn’t bad enough, it was then discovered that CannTrust sold some of the illegally-grown product to Danish cannabis company Stenocare A/S, which, unknowingly sold some of it to its medical patients.
For any avoidance of doubt, The Canadian Cannabis Act prohibits the export of unlicensed marijuana and says that anyone found guilty of doing so is at risk of being fined or going to jail.
The company appointed a special committee to get to the root of the issues and stop the bleeding, but it didn’t help much at all.
Eight Capital came in with a sell rating and a $2.00 CAD per share price target, $0.45 CAD per share lower than the company’s 52-week low.
Signaling at what’s to potentially come of the situation, the board has even appointed a financial advisor to assist in a review of strategic alternatives including the sale of the company.
Not surprisingly, on Friday, August 9th, CannTrust announced that their public accountant KPMG withdrew its auditor reports, essentially stating that CannTrust’s audited financial reports “should no longer be relied upon.”
Health Canada’s New Findings
After the markets closed on the 9th, CannTrust received a report from Health Canada notifying the company that its manufacturing facility in Vaughan, Ontario has also been rated non-compliant with certain regulations. I told you we’d come back to it!
“Health Canada found during a July 10 to 16 inspection that the Vaughan facility was using rooms converted from operational areas to storage areas since June 2018 without permission; it had constructed two new areas without prior approval, one of which was used to store cannabis; had inadequate security controls at the facility; had inadequate quality assurance investigations and controls; was using standard operating procedures that did not meet requirements under regulations; and was not retaining documents or information in a manner that would allow the regulator to complete its audit in a timely manner,” reported Ciara Linnane at Dow Jones & Company.
Since the announcement hours ago, at least one law firm has already filed a class-action lawsuit against CannTrust Holdings Inc. for violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the U.S. Securities and Exchange Commission.
Things seem to be getting worse and worse over at CannTrust.
As CannTrust’s newly-appointed interim CEO, Robert Marcovitch, and the Special Committee continue the process of “investigating and remediating the root causes of any non-compliance,” be sure to subscribe to CannTrust updates here so you never miss an important development.
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