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Health Canada Lays the Hammer Down on CannTrust -- Now What?

By Sean Williams - Sep 20, 2019 at 7:51AM

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After illegally growing marijuana for six months, CannTrust finds out its fate.

The marijuana industry might be a big-money business model, but it has also developed serious trust issues with Wall Street and investors. At the heart of those issues is Ontario-based grower CannTrust Holdings (CNTTQ -80.00%).

As some of you may know, CannTrust reported a serious breach of investor trust, and a clear subversion of cannabis regulations in Canada, in early July. Following a Health Canada review, CannTrust announced that the company had been growing marijuana in five unlicensed rooms at its flagship Niagara facility between October and March, with these rooms subsequently becoming licensed in April.

Furthermore, it was eventually disclosed that a handful of top executives at CannTrust were aware of this ongoing deception, including now-former CEO Peter Aceto, who was fired from his post.

A gavel next to a handful of dried cannabis buds.

Image source: Getty Images.

In the more than two months since CannTrust came clean, the company had approximately 5,000 kilos of inventory placed on hold by Health Canada, as well as had its ability to sell cannabis temporarily suspended by the regulatory agency. The big question has been: What sort of punishment would Health Canada levy on CannTrust for such an egregious breach of cannabis licensing regulations?

Well, now we know.

Health Canada passes judgment on CannTrust's deception

During Tuesday's trading session, CannTrust's stock was halted pending news. That news was the announcement that Health Canada has officially suspended the company's cultivation and sales license until such time as the company has become compliant with a laundry list of deficiencies. As noted in the press release, CannTrust is expected to:

  • Take measures to recover illicitly produced marijuana that made it to the marketplace;
  • Improve key personnel's knowledge of, and compliance with, the Cannabis Act;
  • Ensure that cannabis is only produced in licensed rooms and remains fully in compliance with the Cannabis Act; and
  • Improve recordkeeping, which includes inventory tracking.

The press release does point out that while the new planting of cannabis is off-limits, the company will be allowed to cultivate and harvest marijuana that's already growing. Further, subsequent processing of this cannabis will be allowed, such as drying, trimming, and milling the product. Once these ancillary activities are complete, this product can be placed in the company's inventory until such time as it regains compliance. 

A gloved processor with scissors trimming a cannabis flower.

Image source: Getty Images.

This actually isn't a worst-case scenario

Amazingly enough, Health Canada's punishment isn't nearly as severe as it could have been for the company. While optimists likely hoped for nothing more than a fine and a slap on the wrist, the other end of the spectrum could have resulted in a complete revocation of the company's cultivation and sales licenses. Were that to happen, CannTrust would have had to go through the licensing process all over again, or may have had to fire-sale its assets to its peers.

The fact that Health Canada chose to suspend CannTrust's cultivation and sales license, as well as allow the company to continue growing and processing already propagated plants, is a really good sign that the agency has the intention of eventually reinstating the company's licenses. And when that happens, there's a pretty good chance that CannTrust will have a healthy inventory of product to sell to Canadian provinces and dispensaries.

Additionally, we haven't heard a lot about the 5,000 kilos of inventory that Health Canada seized following disclosure of the wrongdoing in July, nor the 7,500 kilos of inventory that the company voluntarily put on hold with the investigation ongoing. Health Canada announced plans to test the 5,000 kilos of held inventory for quality, but the fact that investors have heard next to nothing on the subject suggests that quality wasn't a concern. That leaves open the possibility that CannTrust may have all of this inventory returned when and if its license suspensions are lifted.

A half-emptied hourglass on a table.

Image source: Getty Images.

Now, here's the bad news

But make no mistake about it, this isn't good news, either.

Maybe the biggest concern from Health Canada's punishment is that there is no definitive timetable on when CannTrust's licenses will be reinstated. Sure, the agency laid out a clear game plan that will need to be followed if CannTrust is going to be cleared to grow and sell licensed marijuana in the future. But with so many deficiencies to address, it's not going to be something that happens overnight. In the meantime, CannTrust will continue burning through its precious cash as it waits for the all-clear from Health Canada.

CannTrust will also struggle to rebuild trust with investors. It's unclear if there will be a valuation where investors find CannTrust attractive enough to take a stab knowing full well that the company blatantly ignored Cannabis Act regulations. We've witnessed trust issues cripple the likes of Aphria, Namaste Technologies, and TILT Holdings over the past year, but CannTrust is in a realm all by itself given the nature of its deception.

If CannTrust can turns things around -- that's a big "if" -- it looks to be an incredible value. The combined output of Niagara, its smaller Vaughan facility, and its outdoor grow site, which requires little maintenance to get ready for cultivation, could be anywhere from 200,000 kilos to 300,000 kilos per year. At a market cap of $174 million, this would appear to be a steal on paper.

Then again, we just don't know how long CannTrust will take to regain compliance and investor trust. It's become the true definition of an all-or-nothing investment.

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