CannTrust Archives - Green Market Report

CannTrust Holdings Inc. (NYSE: CTST) announced that, after the close of markets on April 13, 2020, the company received a cease trade order issued by the Ontario Securities Commission as a result of  CannTrust’s failure to file the following periodic disclosure required by Ontario securities legislation:

• The Company’s audited annual financial statements for the year ended December 31, 2019;
• Management’s Discussion and Analysis relating to the Company’s audited annual financial statements for the year ended December 31, 2019;
• The Company’s Annual Information Form for the year ended December 31, 2019;
• Interim Financial Statements of the Company for the periods ended June 30 and September 30, 2019;
• Management’s Discussion and Analysis relating to the Company’s interim financial statements for the periods ended June 30 and September 30, 2019;
• Certification of the foregoing filings by the Company as required by National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings.

The CannTrust History

CannTrust’s troubles started last year when a Health Canada audit found that the company was growing cannabis in five unlicensed rooms and that inaccurate information was given to the regulator from CannTrust employees. CannTrust said that it accepted Health Canada’s non-compliance finding and took actions to ensure current and future compliance. At that time, the company said it has suspended all sales and shipments.

CannTrust attempted to sell the company. Since then CannTrust learned in August 2019 that the company’s facility has failed a recent inspection is troubling because it was supposed to have addressed problems from previous inspections in which the company was found to be growing cannabis in rooms that hadn’t received licenses.

As of March 20, 2020, CannTrust had a cash balance of approximately $145 million and it seemed as if the company would fight to try to get its licenses back. But the mountain of lawsuits and fighting those lawsuits would probably cost more than the $145 million it has and needs if it wants to get those licenses.

CannTrust obtained its initial order under the Companies’ Creditors Arrangement Act (Canada) when the company just decided to throw in the towel and quit fighting. “The Company has determined that it does not currently intend to devote additional time or money towards curing its public disclosure defaults by completing and resuming the filing of required reports under Canadian and United States securities laws. Upon completion of its CCAA process, and depending on the circumstances prevailing at that time, the Company may determine to resume devoting additional time and money towards curing its public disclosure defaults by completing and resuming the filing of required reports under Canadian and United States securities laws. However, there can be no assurance at this time that the Company will do so.”

After the market closed on Friday, CannTrust Holdings Inc. (NYSE: CTST)said it received a report from Health Canada telling the company that “Its manufacturing facility in Vaughan, Ontario has been rated non-compliant with certain regulations.” CannTrust stock is dropping over 25% to lately trade at roughly $2.26 in pre-market trading as shareholders learn about the continuing problems with the facilities causing more uncertainty.

The news that the company’s facility has failed a recent inspection is troubling because it was supposed to have addressed problems from previous inspections in which the company was found to be growing cannabis in rooms that hadn’t received licenses.  Health Canada has said that it is currently unable to provide any guidance about the timing or content of its decisions regarding CannTrust.

According to a company statement, Heath Canada’s rating was based on observations made during an inspection completed during the period July 10-16, 2019, which noted:

• The conversion of five rooms from operational areas to storage areas, which were used for storage since June 2018 without prior approval of Health Canada;
  
  
• The construction of two new areas without prior approval of Health Canada, one of which was used to store cannabis since November 2018;
  
  
• Insufficient security controls at the manufacturing facility;
  
  
• Inadequate quality assurance investigations and controls;
  
  
• Standard operating procedures that did not to meet the requirements under regulations; and
  
  
• Documents or information that was not retained in a manner to enable Health Canada to complete its audit in a timely manner.

The company has held back cannabis inventory as a result of the non-compliance issues. The company has said that it is trying to remediate the problems with Health Canada which has resulted in changes in the company’s executive suite.

The company’s interim CEO Robert Marcovitch said, “We are continuing to work hard to regain the trust of Health Canada, our patients, shareholders, and partners. We have retained independent consultants who have already started addressing some of the deficiencies noted in Health Canada’s report. We are looking at the root causes of these issues and will take whatever remedial steps are necessary to bring the Company into full regulatory compliance as quickly as possible.”

Separately, CannTrust said that it pre-paid the outstanding mortgage of approximately $13.3 million to Meridian Credit Union which was secured by its greenhouse in Pelham, Ontario, as well as associated interest and administrative costs.

Following the disastrous revelation that the company began growing cannabis plants in grow rooms without licenses, CannTrust Holdings Inc. (TSX: TRST)(NYSE: CTST) said that its special committee has retained Greenhill & Co. Canada Ltd. as the Special Committee’s financial advisor, to assist in a review of strategic alternatives. Those options include a sale of the company, a merger or changes to the company’s strategy. The interim CEO has said the talks are happening at only a conversation level at this time.

Unlicensed Grow Rooms

Just a few weeks ago, a Health Canada audit found that the company was growing cannabis in five unlicensed rooms and that inaccurate information was given to the regulator by CannTrust employees. CannTrust said that it accepted Health Canada’s non-compliance finding and took actions to ensure current and future compliance.

The growing in the five unlicensed rooms took place from October 2018 to March 2019 during which time CannTrust had pending applications for these rooms. The company received the licenses for each of the five rooms in April 2019.  There are 12 rooms in total at the facility.

Health Canada placed a hold on inventory which includes approximately 5,200kg of dried cannabis that was harvested in the previously unlicensed rooms in Pelham until it deems that the company is compliant with regulations. In addition, CannTrust said it instituted a voluntary hold of approximately 7,500kg of dried cannabis equivalent at its Vaughan manufacturing facility that was produced in the previously unlicensed rooms.

At this time, the company said it has suspended all sales and shipments. A former employee Nick Lalonde told Bloomberg News that he was “instructed to put up fake walls to obscure unlicensed plants in photos submitted to Health Canada.”

Top Executives Bad Behavior

Internal emails showed that CEO Peter Aceto was aware of the illegal growing and has since resigned. It also looks like he lost approximately C$8.2 million in stock options due to his termination with cause. It also seems that another former CEO and board chair Eric Paul sold stock in the company in November 2018 and had been aware of the illegal growing as well. Mark Litman another director of the company also sold shares during November. Thus, insider trading accusations are flying around as well.

Also back in November, the company’s former CFO noted that there were “deficiencies” in the company’s disclosure record in a letter to the Ontario Securities Commission. He said the company had agreed to take “remedial steps” to address them. Board member and interim CEO Robert Marcovitch said those issues had been addressed but didn’t say what they were. He has also said that the company will “clean house.”

The numerous class-action lawsuits are lining up as securities lawyers see this as chum in the water.

Beleaguered cannabis company CannTrust Holdings Inc. (NYSE: CTST) shares were falling 10% in early trading after the company announced it placed a hold on product sales. After the market closed on Thursday, the company said it would voluntarily “hold on sale and shipment of all cannabis products as a precaution while Health Canada visits and reviews its Vaughan, Ontario manufacturing facility.”

Earlier this week CannTrust admitted that a Health Canada audit found that the company was growing cannabis in five unlicensed rooms in its Pelham facility and inaccurate information was provided to the regulator by CannTrust employees. As a part of that announcement the company said it volunteered that there may be storage problems at the Vaughan facility. It seems this decision to stop sales is related to Health Canada heading over to that facility to review its compliance with the rules.

The stock closed at $4.94 on Friday, July 5. It was lately trading at $2.76 on news that all sales have been halted.

The company said that all medical sales made through customer service or through the e-commerce site were stopped as of midnight July 10. The company said it is working with regulators as they review the company’s grow facility. CannTrust also stated that the impact on its future financial results is undetermined. In addition, the said in a statement that a Special Committee of the Board of Directors had been established. “The Special Committee is comprised of independent members of the Board of Directors. The purpose of the Special Committee is to investigate this matter in its entirety,” read the statement.

Unlicensed Grow Rooms

CannTrust said it had accepted Health Canada’s non-compliance finding and had taken actions to ensure current and future compliance. The company stated that the growing in the unlicensed rooms took place from October 2018 to March 2019 during which time CannTrust had pending applications for these rooms with Health Canada. These rooms were constructed in accordance with regulations and Good Production Practices, and licenses were issued for each of the five rooms in April 2019.  There are 12 rooms in total at the facility.

Health Canada has apparently placed a hold on inventory which includes approximately 5,200kg of dried cannabis that was harvested in the previously unlicensed rooms in Pelham until it deems that the company is compliant with regulations. In addition, CannTrust said it has instituted a voluntary hold of approximately 7,500kg of dried cannabis equivalent at its Vaughan manufacturing facility that was produced in the previously unlicensed rooms.

Patients and consumers who have questions about CannTrust products can contact the Company’s customer care team at customercare@canntrust.ca and 1-855-RX4-CANN.