CannTrust Holdings Inc.‘s (NYSE:CTST)(TSX:TRST) shares continued to take a beating on Wednesday after Ontario officials announced the company’s cannabis products would be pulled from the province’s store shelves due to the pot producer getting caught offside with Canada’s federal growing regulations.
The company said on Monday an inspection by Health Canada revealed it had been producing thousands of kilograms of cannabis in five unlicensed rooms at its Pelham, Ontario greenhouse before the appropriate permits were obtained. As a result, the federal agency has 12,700 kilograms of dried cannabis on hold while it conducts an investigation.
“Due to the Health Canada temporary hold on certain CannTrust cannabis products, [Ontario Cannabis Store] has voluntarily removed all affected products from distribution pending the outcome of the investigation,” the provincial pot distributor told BNN Bloomberg.
The Ontario pot company said it has been communicating with every province to enable them to make decisions regarding its product availability while Health Canada carries out is probe.
The investigation is expected to last another eight to 10 business days as of Wednesday.
A “wake-up call” for the cannabis industry
The Ontario cannabis producer said it was unclear how much Health Canada’s non-compliance finding will impact its financials. But CannTrust did say it would source out cannabis supply from third parties to help fill the pending shortages.
The 12,700 kilograms of dried cannabis on hold could be worth up to $70 million, according to the CEO RavenQuest Biomed.
CannTrust’s shares plunged from $6.46 when the Toronto Stock Exchange opened Monday to $4.12 when it closed Wednesday – a staggaring 36 per cent decline.
This is a wake-up call for the cannabis space in a bunch of ways
“With more of these massive blue chip, multinational companies getting involved in the industry, that brings an increased focus on operational excellence,” Foster told BNN Bloomberg. “What we’re seeing now are these growing pains that have to be rectified immediately because it brings a dark cloud over the industry.”
Bruce Campbell, the founder and portfolio manager of Stonecastle Investment Management Inc., said his phone lit up with panicked calls after the news broke of CannTrust’s mishap.
“This is what investors in the sector deal with every day,” Campbell told The Financial Post. “There’s going to be news that rocks the business both up and down that you can’t mitigate around.”
Richard Leblanc, an ethics and law professor at York University, said Canadian pot companies need to start appointing independent boards to make sure they are doing business with a laser-focus on compliance.
“We’re in the early stages of governance maturity of these companies,” Leblanc said. “As they expand globally and go into other markets, the lack of governance will hurt them.”
Can CannTrust be trusted?
It’s hard to put into perspective how CannTrust’s recent major blow will reshape the company or change the already rapidly shifting cannabis industry. More than $330 million was wiped from its value by market capitalization in just three days.
Surprisingly, the chairman and founder of CannTrust remained calm after the news came to light and said he still has faith in the company’s CEO Peter Aceto.
“People are out there calling for someone’s head,” Chairman Eric Paul said. “You know that’s a typical reaction to these kinds of things but that’s not a fair or appropriate thing to do.”
CannTrust said it is unclear at this time how this problem unfolded, but the company has hired an external firm to conduct a “root-cause analysis.”
Meanwhile, the news keeps getting worse for the company as two major Canadian banks downgraded CannTrust and lowered their target prices for the stock.
Royal Bank of Canada downgraded the company from “outperform” to “perform” and dropped its target price to $5 from $13. Whereas, Bank of Montreal cannabis analyst Tamy Chen downgraded CannTrust from “outperform” to “speculative” and cut her target price to $6 from $11.