CannTrust Holdings (NYSE:CTST) had been in limbo for months, awaiting what seemed like the inevitable: the suspension of its licenses. Health Canada finally brought the hammer down last week when it confirmed that CannTrust would be suspended.
While the cannabis producer technically didn't lose all of its licenses as it can still cultivate and harvest its existing lots, the reality is that the company is in a dire situation. Without the reinstatement of its license, CannTrust could be seeing the beginning of the end.
Is reinstatement possible?
Health Canada's notice that it was going to suspend CannTrust did allow a path for the cannabis company to get its license back if it were to meet certain conditions. According to the release issued by CannTrust, the notice from Health Canada said the license would be reinstated "if the reasons for the suspension no longer exist or if CannTrust demonstrates that the suspension was unfounded."
The latter condition appears to be a long shot, especially given that the company had problems at multiple sites, a whistleblower alleged the company was building fake walls, and most recently, the company had been using illegally sourced seeds. Although investors are not privy to the exact reasons for the suspension, if those allegations are true, it would be an uphill battle to say that the suspension was unfounded.
The former condition seems to be the more realistic path for CannTrust to take in order to prove to the regulators that it has sufficiently cleaned up its act and that a suspension is no longer necessary. The problem is that this is very hazy, as well, and gives Health Canada a lot of leeway.
CannTrust has already been making some significant changes, including the removal of its CEO Peter Aceto at the time the scandal first broke. Whether or not the changes the company has made will be enough, however, is the big question.
Why it may not happen
There haven't been many suspensions that have taken place thus far, and only one company has seen its license get revoked entirely -- Agrima Botanicals. If we use that company as an example, it doesn't bode well for CannTrust.
For one thing, the process took a very long time. Agrima was told by Health Canada in September 2018 that it was in violation of "record keeping and other compliance requirements." About two months after that, the company learned its responses and plans to rectify the situation were "not satisfactory" and that the licenses would be revoked.
The company would go on to appeal the decision but to no avail. It made changes to management and hired legal counsel to help navigate the hearing process. Alas, it was all for naught as the company still ended up losing its license completely. However, it wasn't until a few months ago when that became official.
For CannTrust, this paints a gloomy picture. Not only has the company run into very similar problems with "unauthorized activities" taking place, but the issues have been much more public than we've seen before, and that could pressure regulators to act swiftly. Overturning the suspension could send a bad message to the industry and investors given the severity of the issues.
Key takeaway for investors
CannTrust is in a lot of danger today, and it would be extremely risky to invest in the stock given the likelihood that it may not get its license back. When you consider there's no shortage of pot stocks to invest in, there's little reason to take a chance on CannTrust. The stock is a very speculative buy today and the odds of a recovery at this point look very slim.