CannTrust Could Lose Its Pot License Amid a Deepening Sell-Off

(Bloomberg) -- CannTrust Holdings Inc. tumbled another 17% Friday after the Canadian pot company halted sales of its products while its chief executive officer said regulators are inspecting a second facility.

CannTrust shares have lost 48% since the beginning of the week, when it disclosed that Canadian regulators gave a non-compliant rating to its greenhouse in Pelham, Ontario. In an unannounced inspection, regulators found the company grew pot in unlicensed rooms, provided “false and misleading information” to inspectors and had inadequate record keeping, according to Health Canada spokeswoman Tammy Jarbeau.

Now regulators are also inspecting CannTrust’s facility in Vaughan, Ontario after the company “voluntarily brought forward a handful of compliance issues,” including with storage, CEO Peter Aceto said in a phone interview.

“We’re growing very, very rapidly and we just need to make sure that cannabis is in properly licensed rooms, so we voluntarily disclosed some minor issues with regards to that,” he said.

The stock fell to C$3.34 Friday in Toronto, and has dropped for seven straight sessions. The fallout also hit the cannabis sector as a whole, with the Horizons Marijuana Life Sciences Index ETF down 4.5% to the lowest since Jan. 8. Canopy Growth Corp. lost 8%, while Cronos Group Inc. fell 6.2% and Hexo Corp. slid 5.4%.

CannTrust said Thursday night that it’s put a voluntary hold on the sale and shipment of all its medical and recreational products. It’s also appointed a special committee of the board, comprised of independent directors, to investigate the breach.

Aceto said the company is working to source third-party supply for its medical patients and is working to figure out exactly what went wrong with the help of the special committee and an external firm.

“We are in a situation that no one wishes to be in,” he said. “Our focus has got to be getting to the root cause, finding out exactly what happened, and I think this independent committee, this external firm is really going to help us get to the bottom of things with urgency.”

Aceto said one person has been fired since the revelation. Now he’s focused on getting back into compliance as quickly as possible. Canadian law gives Health Canada a number of ways to respond to non-compliance, including “suspension or cancellation of a federal license” or the issuance of a fine up to C$1 million, Jarbeau said in an email.

“I think that a license suspension is possible,” said Charles Taerk, chief executive officer of Faircourt Asset Management, which runs the cannabis-focused Ninepoint Alternative Health Fund. Taerk reduced his holdings of CannTrust to less than 1% of his portfolio after the company’s last quarterly earnings report, and sold the remainder of his position on Tuesday.

“We had removed CannTrust from our top 10 two months ago, not because of this issue but because of other operational issues we were concerned about,” Taerk said in a phone interview, citing the company’s weak results and the lack of answers from management. “Where there’s smoke there’s fire sometimes, and people didn’t pay attention to that.”

CannTrust’s voluntary hold on sales and shipments is likely to last into late July “at a minimum,” said Eight Capital analyst Graeme Kreindler, who downgraded the stock to sell from neutral and cut his price target to C$4 from C$6.

“The possibility of a license suspension remains real; however, it is highly uncertain at this time,” Kreindler wrote in a note. “In the event of a suspension, we believe that TRST’s cash position could sustain the company for a period of approximately 12 months considering last quarter’s operating burn was $19 million.”

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, David Scanlan, Stephen Wicary

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