Can­nTrust halts all cannabis sales

The Globe and Mail (Ottawa/Quebec Edition) - - FRONT PAGE - CANNABIS IN­DUS­TRY RE­PORTER MARK REN­DELL

Pro­ducer also es­tab­lishes spe­cial com­mit­tee to in­ves­ti­gate al­leged il­le­gal grow­ing ac­tiv­i­ties as Health Canada con­tin­ues probe

Can­nTrust Hold­ings Inc. has halted sales of all cannabis prod­ucts amid a Health Canada in­ves­ti­ga­tion into il­le­gal grow­ing ac­tiv­i­ties that saw the com­pany cultivate thou­sands of kilo­grams of mar­i­juana in un­li­censed rooms.

In a state­ment on Thurs­day evening, the com­pany said that it has im­ple­mented a “vol­un­tary hold on sale and ship­ment of all cannabis prod­ucts” while Health Canada investigat­es its man­u­fac­tur­ing fa­cil­ity. The an­nounce­ment comes one day after On­tario and Al­berta’s pro­vin­cial whole­salers stopped sell­ing Can­nTrust prod­ucts. Can­nTrust also said Thurs­day that it has es­tab­lished a spe­cial com­mit­tee com­posed of “in­de­pen­dent mem­bers of the board of di­rec­tors. The pur­pose of the spe­cial com­mit­tee is to in­ves­ti­gate this mat­ter in its entirety.”

Can­nTrust shares have plum­meted nearly 40 per cent since Mon­day, when the com­pany ac­knowl­edged that Health Canada is­sued a non­com­pli­ance or­der to Can­nTrust for grow­ing cannabis in five un­li­censed rooms in its 12room green­house in Pel­ham, Ont., be­tween Oc­to­ber, 2018, and March.

Can­nTrust also ac­knowl­edged Mon­day that em­ploy­ees sent “in­ac­cu­rate in­for­ma­tion” to fed­eral reg­u­la­tors. On Wed­nes­day, The Globe and Mail re­ported al­le­ga­tions from a former employee that Can­nTrust used fake walls in its un­li­censed rooms to cover up il­le­gally grown plants in staged pho­to­graphs that were sent to Health Canada.

Nick Lalonde, who over­saw dis­posal op­er­a­tions at the com­pany’s green­house, told The Globe that Can­nTrust ex­plic­itly mis­led fed­eral reg­u­la­tors: “We’re hang­ing these poly walls, these white poly walls … mov­ing ta­bles with hun­dreds of plants on them out of the cam­era view, just to snap a pic­ture of the room with noth­ing in it.”

Fed­eral reg­u­la­tors have put a sales freeze on 5,200 kg of cannabis that the com­pany had grown in the five un­li­censed rooms.

Prior to the com­plete halt to sales an­nounced Thurs­day evening, the com­pany had cho­sen not to sell an ad­di­tional 7,500 kg of prod­uct that was grown in the un­li­censed rooms in the same time pe­riod.

With Can­nTrust stock sinking to its low­est point since Oc­to­ber, 2017, Bay Street an­a­lysts are now openly ques­tion­ing whether the com­pany will lose its grow­ing li­cence, and it faces the pos­si­bil­ity that it will be forced to de­stroy thou­sands of kilo­grams of cannabis, worth tens of mil­lions of dol­lars.

“Clearly, the ma­jor concern among in­vestors at this point is whether Health Canada will look to make an ex­am­ple out of Can­nTrust and po­ten­tially pull the com­pany’s pro­duc­tion li­cence,” Canac­cord Ge­nu­ity Corp. an­a­lyst Derek Dley wrote in a re­search note pub­lished on Thurs­day, in which he down­graded the com­pany’s stock to “hold” from “spec­u­la­tive buy” and cut his tar­get price to $5 from $12.

“While we had orig­i­nally viewed [a li­cence sus­pen­sion] as highly un­likely, we are now ac­knowl­edg­ing that this could be within the realm of pos­si­bil­ity. We be­lieve the com­pany will, at a min­i­mum, face a fine and be forced to de­stroy the 5,200 kilo­grams of cannabis which were pro­duced in the rooms in ques­tion,” Mr. Dley wrote.

Can­nTrust ac­knowl­edged on Thurs­day that a li­cence sus­pen­sion was pos­si­ble.

“We are tak­ing these ob­ser­vances very se­ri­ously, and we are work­ing closely with Health Canada and our in­ter­nal teams to im­ple­ment new pro­cesses and a com­pa­ny­wide re­train­ing pro­gram, as well as con­duct­ing a full in­ter­nal in­ves­ti­ga­tion and pre­par­ing a re­port to the reg­u­la­tor, in­clud­ing mit­i­gat­ing fac­tors,” the com­pany said in a state­ment.

On Wed­nes­day, the Al­berta Gam­ing, Liquor and Cannabis Com­mis­sion said that it was plac­ing a hold on all “af­fected lots” from Can­nTrust, while the On­tario Cannabis Store – the prov­ince’s whole­saler and on­line re­tailer – said it was end­ing sales of all Can­nTrust prod­ucts “pend­ing the outcome of the [Health Canada] in­ves­ti­ga­tion.”

The com­pany is now in a wait­ing pe­riod while Health Canada con­ducts “qual­ity checks” on prod­ucts seized from Can­nTrust fa­cil­i­ties; the process is meant to wrap up on July 17. After that, the fed­eral reg­u­la­tor has a num­ber of op­tions for how to pro­ceed.

“There re­mains a high de­gree of un­cer­tainty with re­spect to the po­ten­tial for fu­ture le­gal and reg­u­la­tory reper­cus­sions. This in­cludes a pos­si­ble li­cence sus­pen­sion or re­vo­ca­tion by the reg­u­la­tor,” Eight Cap­i­tal an­a­lyst Graeme Kreindler wrote in a re­search note on Mon­day. “Ac­cord­ing to the Cannabis Act, the reg­u­la­tor may sus­pend a li­cence in or­der to pro­tect pub­lic health and safety. The reg­u­la­tor can re­voke a li­cence if the holder has con­tra­vened a pro­vi­sion in the act since the li­cence was is­sued.”

Health Canada has sus­pended cannabis li­cences twice be­fore, for the Maple Ridge, B.C.-based grower Agrima Botan­i­cals Corp. and for Win­nipeg-based Bonify Med­i­cal Cannabis. For Agrima, whose par­ent com­pany at the time was As­cent In­dus­tries Corp., the com­pany was found to have been sell­ing prod­ucts into the black mar­ket. Bonify, by con­trast, was caught sourc­ing cannabis from the il­le­gal mar­ket.

In both cases, there was a pe­riod of sev­eral months be­tween the ini­tial in­ves­ti­ga­tion by Health Canada and an an­nounce­ment that the fed­eral reg­u­la­tor in­tended to sus­pend the li­cences.

Can­nTrust’s non-com­pli­ance or­der does not ap­pear to per­tain to prod­uct be­ing di­verted into the black mar­ket. That fact sug­gests the com­pany’s li­cence will not be sus­pended, Royal Bank of Canada an­a­lyst Douglas Miehm wrote in a note on Tues­day, in which he cut his price tar­get for Can­nTrust to $5 from $13.

“The agency has his­tor­i­cally sus­pended li­cences when [li­censed pro­duc­ers] were found to source/divert prod­uct from/to an un­reg­u­lated chan­nel. In our view, the Can­nTrust sit­u­a­tion does not ap­pear as dire as these sce­nar­ios,” Mr. Miehm wrote.

What­ever hap­pens to the li­cence, a num­ber of an­a­lysts are pre­dict­ing that Can­nTrust will be forced to de­stroy a sig­nif­i­cant amount of cannabis that was grown in its un­li­censed rooms.

Ac­cord­ing to Mr. Kreindler of Eight Cap­i­tal, the 12,700 kg be­ing held back from mar­ket amounts to roughly 70 per cent of Can­nTrust’s in­ven­tory bal­ance, as of its last re­ported quar­ter. It also equals roughly four times the com­pany’s pre­vi­ous quar­ter sales.

“Based on last quar­ter’s av­er­age net sales price of $5.47/g, we es­ti­mate that be­tween $28-mil­lion and $69-mil­lion in fu­ture sales could be at risk,” Mr. Kreindler wrote.

The pos­si­bil­ity that Can­nTrust will have to de­stroy a con­sid­er­able amount of its prod­uct comes at a time when Cana­dian li­censed cannabis pro­duc­ers are strug­gling to meet mar­ket de­mand for high-qual­ity prod­ucts.

“Even if the com­pany does re­tain its li­cence, at a min­i­mum the cred­i­bil­ity of Can­nTrust has now been put into ques­tion; and given that prior to Mon­day’s news of a com­pli­ance breach, Can­nTrust had been viewed as one of the high­est-qual­ity com­pa­nies in the space, we be­lieve that in­vestors are un­likely to re­ward Can­nTrust with a premium mul­ti­ple going for­ward,” Mr. Dley of Canac­cord wrote.

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