Practically one year ago on Oct. 15, 2018, marijuana stocks would peak at their collective all-time high, as measured by the Horizons Marijuana Life Sciences ETF, the very first exchange-traded fund focused on cannabis. Since then, it's been a wild -- and mostly disappointing -- ride.
Of course, no shareholders are more disappointed than those of Ontario-based CannTrust Holdings (NYSE:CTST). Shares of CannTrust are down more than 90% over the trailing one-year period.
CannTrust's big boo-boo costs the company its grow and sales licenses (for now)
While CannTrust has fallen victim to the same issues that have impacted the entire Canadian pot industry, including supply shortages, the company's fatal flaw has been its egregious loss of investor trust. Back in early July, the company announced that, following a review from regulatory agency Health Canada, it had been growing marijuana in five unlicensed rooms at its flagship Niagara grow farm for a period of six months (Oct. 2018 to March 2019). These rooms were subsequently licensed in April.
Initially, Health Canada seized 5,000 kilos of inventory associated with these previously unlicensed grow rooms, and CannTrust placed an additional 7,500 kilos of inventory at its smaller Vaughan facility on hold, while the regulatory agency conducted its investigation. During this deeper dive into CannTrust's wrongdoing, it was uncovered that then-CEO Peter Aceto knew of these illicit grow operations and did nothing to stop them, which led to his termination.
A company whistleblower also recounted efforts to cover up these illicit grow rooms with fake walls. And all the while, Health Canada also placed a temporary suspension on the company's ability to sell marijuana, with its investigation ongoing.
Last month, Health Canada finally came to a ruling on how best to punish CannTrust. The agency decided that officially suspending the company's cultivation and sales licenses was the best course of action. However, Health Canada is allowing CannTrust to grow and harvest already propagating plants, as well as process these plants (i.e., dry, trim, and mill the product).
The next ball drops: CannTrust watches $58 million go up in smoke
Health Canada also gave CannTrust a laundry list of deficiencies that it would need to address if it wanted its cultivation and sales licenses back. In no order, these are to:
- take measures to recover illegally grown marijuana
- improve recordkeeping and inventory tracking
- bolster key personnel's knowledge of and compliance with the Cannabis Act
- guarantee that only compliant cannabis is being grown in company facilities
CannTrust, for its part, has been working to recover marijuana that was grown and potentially sold from these unlicensed rooms and has been updating Wall Street and investors on its progress, as required, on a bi-weekly basis. But on Monday, Oct. 14, we learned of the next cost to the company for using poor judgment and growing marijuana illegally.
According to a press release from the company, its board of directors has decided to destroy 12 million Canadian dollars of biological assets (i.e., plants) and CA$65 million worth of inventory that was not authorized for grow. That's CA$77 million in marijuana -- (note, this figure also includes sold cannabis that was recovered) -- that'll literally go up in smoke, or $58 million if converted to U.S. dollars.
The decision to destroy this marijuana is simple to make for CannTrust's board. Health Canada won't allow the company to sell or process this inventory or these plants, according to the list of deficiencies it outlined last month. Thus, destroying it will hopefully demonstrate to Health Canada that CannTrust is taking its license suspensions seriously and is eager to regain compliance. Plus, with Health Canada allowing the company to continue growing already propagating plants, the company will need the inventory space once these crops are harvested and processed.
Is CannTrust turning the corner?
Clearly, CannTrust has a lot of issues it needs to contend with over the coming weeks, months, and years. It needs to convince Health Canada to reinstate its cultivation and sales licenses. Then, it'll have to find buyers for its product and convince investors that they can trust the company's new management. By no means is this an easy task, nor is it in any way guaranteed to be successful on any level.
However, the case could also be made that CannTrust is near turning the corner, so to speak. This isn't to say that the company's outlook will get better in the near term, so much as to suggest that the worst may now be behind it. Sure, CannTrust could still very well become the first major market cannabis stock to be delisted from the New York Stock Exchange, especially considering that it's yet to report its second-quarter operating results and may restate its previous quarterly results. But with Health Canada choosing to suspend, not revoke, the company's licenses, as well as allowing CannTrust to continue working on its already propagating plants, it would appear that the regulatory agency wants the company to succeed in regaining compliance.
If CannTrust is able to regain compliance, it could be one of the cheapest pot stocks in the industry, albeit with some serious flaws and caveats. We're talking about a company with 100,000 kilos of peak annual production potential from indoor hydroponic grow farms, and another 100,000 kilos to 200,000 kilos of annual outdoor peak grow potential. Essentially, it's a top-five grower by peak output, assuming it regains its licenses and has the capital to complete its outdoor facility and planting.
Make no mistake about it -- CannTrust's future remains very uncertain. But with the company beginning the process of bending over backwards to regain compliance, it's worth keeping an eye on.