CannTrust Caught Producing Cannabis Illegally in Unlicensed Location

Canntrust Holdings (TSX: TRST) (NYSE: CTST) issued a news released this morning identifying that an inspection audit carried out by Health Canada revealed that cannabis was growing in unlicensed space at their Pelham, Ontario facility.

The company has referred to the matter as a “non-compliance” finding, rather than identifying that it was simply an illegal action conducted by the company.

The revelation to Health Canada was the result of whistleblower activity, wherein employees of the company reached out to the Canadian regulator to identify that the company was growing product in five unlicensed rooms from the period of October 2018 to March 2019.

Licensing for these rooms was received in April 2019, bringing into question Health Canada’s own licensing processes if crop cycles had already occurred in these locations without the regulator realizing.

Health Canada has currently placed a “hold” on inventory of Canntrust that consists of 5,200 KG of product. The company has stated that it placed an additional, 7,600 KG of product into a “voluntary hold” at its Vaughn, Ontario facility, as a result of this product being produced at Pelham.

While the company indicates that it still currently has its licenses from the regulator to cultivate and sell cannabis products, the future status of these licenses will be in question as Health Canada provides its ruling.

Current operations, while stated to be active by the company, are effectively on hold as a result of the current inventories being put on some form of “hold”. As of Canntrust’s latest filings, filed May 14, they had 7,582 KG of cannabis in inventory. An additional 17,397 KG of cannabis was expected to be harvested from currently in progress grows. With this including the illegal operation, there’s no telling how much of the in progress product was destroyed or otherwise placed on hold.

The news comes as a further hit to investors, following the announcement last week that Canntrust would be reducing guidance for its outdoor grow. At the time, the company did not indicate why a license had not been provided as of yet, with the company reducing production estimates from that of 75,000 KG to that of 0 – 15,000 KG should the license be awarded in the near term. It can be reasonably assumed that the company will not be receiving this license at all now as a result of the recent conduct by Canntrust Holdings.

Rumours had swirled over the past weekend across social media, identifying that Health Canada and authorities had been at the Canntrust facility over the previous two weeks conducting some form of audit, wherein material was seen leaving the facility. Due to the nature of the rumours, no media sources appear to have commented on the matter without sufficient sourcing of the original information.

Peter Aceto, Chief Executive Officer of Canntrust Holdings, commented on the matter, “Our team has focused on building a culture of transparency, trust and excellence in every aspect of our business, including our interactions with the regulator. 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.”

Interestingly, Aceto took on the role of CEO of Canntrust beginning October 2, which lines up almost exactly with the time period in which the company was growing product illegally. Prior to taking the role at CannTrust he had served as CEO of Tangerine Banking for a period of ten years.

Canntrust Holdings shares on the NYSE are currently down over 20% in premarket trading, with the last price posted being $3.95. Canntrust closed at US$4.94 on Friday.

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Information for this briefing was found via Sedar and CannTrust Holdings. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.