CannTrust Dips After Regulator Finds Illegitimate Growing

Shares of cannabis producer CannTrust Holdings (NYSE:CTST,TSX:TRST) took a hit on Monday (July 8) after the firm was found liable by Health Canada of non-compliant growing at its Pelham, Ontario, facility.

The Ontario-based marijuana firm issued a statement to shareholders confirming the notice from the federal government cannabis regulator.

The stock for the company declined over 20 percent in value after the opening bell both in New York and Toronto.

As of market close, shares of CannTrust in New York had dropped to a price of US$3.83, while in Toronto the stock was valued at C$5 per share.

Canadian regulators slapped the firm with the warning after they found that growing of cannabis took place in five unlicensed rooms in the firm’s Pelham, Ontario facility, dubbed the Niagara Perpetual Harvest Facility.

Health Canada also pointed to awry information shared by employees of the company.

“The decision to grow in the unlicensed rooms were an error in judgement and we take full accountability,” a CannTrust representative told the Investing News Network (INN) in an email statement. “We are preparing a full report to the regulator, including a root cause analysis and mitigating factors.”

The CannTrust Pelham facility has a total of 12 growing rooms. According to the marijuana producer, the five rooms in question were licensed in April, but the unregulated growing took place between October 2018 and March 2019.

According to the producer, Health Canada placed an immediate hold on 5,200 kilograms worth of dried cannabis product. Beyond the regulator product hold, the firm is instituting its own hold on 7,500 kilograms of dried cannabis that was produced in the unlicensed rooms.

The marijuana producer confirmed that one person was fired at its Niagara facility related to the unregulated growing. Additionally, CannTrust announced it will face a shortage of product due to the holds on product grown.

CannTrust investors will have to wait in order to find out just how expensive these material losses will be for the firm’s bottom line, as the company failed to provide an estimate on these costs.

When asked if the product placed on hold would become a material loss for the company, a CannTrust representative declined to confirm and said further updates would be shared at a later time. However, the company has confirmed that its current licenses remain in place.

CannTrust’s CEO Peter Aceto did not dispute the claims from the regulators and accepted that the company made mistakes.

According to Aceto, Health Canada inspectors made a surprise visit to the Niagara facility in June and issued a report on the company’s non-compliance on July 3. The department has demanded a formal response from CannTrust by July 17 to determine exactly how the unlicensed growing took place.

“We have made many changes to make this right with Health Canada. We made errors in judgement, but the lessons we have learned here will serve us well moving forward,” Aceto said in a statement.

CannTrust faced its first downgrade following the news from Bank of America’s (NYSE:BAC) division Merrill Lynch analyst Christopher Carey.

Carey downgraded his stance on the company and issued a sell position for investors of the Canadian producer, according to analyst research aggregator TipRanks. Similarly, Graeme Kreindler with Eight Capital switched his recommendation to “Hold.”

At the time of this writing, the company had an average analyst price target of US$7 in New York and C$12.50 in Toronto, according to TipRanks.

Aceto told the Financial Post that some product from the unlicensed rooms was shipped to provincial partners for sale.

Analysts from Bank of Montreal (NYSE:BMO,TSX:BMO) had issued a warning to investors on the ability for CannTrust to deliver on its production targets back in January, when the company faced concerns over its facility.

This isn’t the first time CannTrust’s Pelham facility has been in the spotlight for investors. After obtaining an approval for construction, the company was left scrambling last October after a bylaw was approved to put a pause on the project.

In January, the firm cut a deal with the Ontario municipality to move ahead with its facility construction at a reduced size and apply changes requested by the community.

Aceto told the Investing News Network that CannTrust and the Pelham city council had come to a mutual understanding that allowed the company to continue its project after the bylaw was approved,

In a statement to INN, a CannTrust representative said the decision to grow in the unlicensed rooms was not connected to the delays in the facility.

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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.