It has not been a pretty past year for marijuana stocks. Despite ending the first quarter of 2019 on a high note, the industry has (pardon the overused cliché) gone up in smoke ever since.
In the largest marijuana market in the world by annual sales, the United States, high tax rates have made it virtually impossible for legal-channel weed to compete with black market pricing in the early going. Meanwhile, supply issues in Canada's most-populous province, Ontario, have created bottlenecks for a region still dominated by the black market.
But perhaps no company has been put through the ringer more than Ontario-based CannTrust Holdings (NYSE:CTST).
CannTrust comes clean about a blatant violation of the Cannabis Act
While we've witnessed plenty of instances where cannabis stocks have lost investor's trust over the past year and change, nothing has been more egregious than what CannTrust did. In July 2019, the company announced that it had grown marijuana illegally in five unlicensed rooms at its flagship Niagara facility for a period of six months (Oct. 2018 – March 2019). Additional investigations also showed that now-former CEO Peter Aceto knew of this illicit grow operation and did nothing to stop it.
As you can imagine, Health Canada didn't take too kindly to a licensed producer knowingly subverting the Cannabis Act and had a number of punishments at its disposal, should it choose. Rather than completely revoking CannTrust's cultivation and sales licenses at both Niagara and its much smaller Vaughan facility, the regulatory agency chose to grant some degree of leniency and simply suspended the company's cultivation and sales licenses indefinitely.
In order to regain these licenses, Health Canada gave CannTrust a laundry list of deficiencies that it would need to satisfy. This included recovering illicitly grown weed that was sold or in inventory, improving its personnel's knowledge of the Cannabis Act, and keeping better seed-to-sale records.
Since Health Canada completed its investigation and officially suspended the company's ability to grow and sell cannabis at both facilities in September, CannTrust has been unable to generate any meaningful revenue and has laid off about 140 workers (which it hopes will be on a temporary basis).
Additionally, CannTrust has been unable to file its quarter income statements with the regulators, with its last quarterly filing coming over nine months ago. This has left its listing status on the New York Stock Exchange very much in doubt.
CannTrust's make-or-break moment is here
But the news that CannTrust's shareholders have been waiting for has finally arrived. Or, should I say, the company's make-or-break moment is here.
On Friday, Feb. 14, prior to the opening bell, CannTrust announced a number of corporate updates, which included its remediation plan. The company announced plans to file documentation on Feb. 14 with Health Canada to reinstate its cultivation and sales licenses at Niagara, with its filing to do the same at the much smaller Vaughan facility expected during the second quarter.
Since announcing its illicit grow operations in July, CannTrust has made efforts to recover its illegally grown pot and even destroyed $58 million (that's U.S.) worth of inventory. Last week's filing fits with the company's previously issued timeline to refile this documentation before the end of the first quarter.
However, the company is now at the mercy of Health Canada, which isn't exactly on a timeline, and hasn't been particularly swift at reviewing licensing applications. Given the gravity of CannTrust's breach of the Cannabis Act and the coverage it received in lieu of breaking the law, it wouldn't be surprising to see CannTrust receive a verdict from Health Canada within the next couple of months. Then again, it took more than two months just for Health Canada to come to the decision to officially suspend CannTrust's licenses in the first place.
All the while, CannTrust is liable to continue whittling away at its CA$167 million in cash on hand, as of the end of January.
CannTrust might be a bad-news buy, but it could just as easily implode
As the company plainly states in its press release, there are no assurances that Health Canada will reinstate its licenses. And, should Health Canada choose to do so, there's no timeline of when that'll happen, or what conditions might be attached. But if CannTrust is able to regain its growing and selling licenses at Niagara, this stock might be a bad-news buy.
One consideration to make here is that CannTrust hasn't exactly lost a lot of ground to its peers. Those aforementioned supply issues throughout most of Canada haven't allowed pot stocks to reach anywhere near as many consumers as they'd like. Long story short, none of Canada's growers have run away from the field in the market share department, providing plenty of opportunity for CannTrust to slide right back in as a major supplier. Remember, this is one of only a small number of growers to have signed supply deals with every province.
Investors should also take into account that CannTrust's lack of cultivating and sales activity has allowed it to conserve capital at a time when marijuana stocks are facing serious financing concerns. Having not made any grossly overpriced acquisitions like many of its peers, CannTrust's balance sheet is (likely) in decent shape.
The Niagara facility, which leans on hydroponic production, should also have inexpensive access to water and electricity that'll allow for below-average per-gram production costs.
Then again, downsides still remain. There's the possible delisting from the New York Stock Exchange, as well as trust issues, which are arguably the hardest to overcome. As a shareholder, I remain cautiously optimistic in regard to the company's future, but am not oblivious to the possibility that CannTrust could simply implode, especially if it fails to regain its licenses at Niagara in a timely manner.