The Financial Impact of CannTrust Holdings Illegal Actions

CannTrust Holdings (TSX: TRST) (NYSE: CTST) has stopped selling product to patients. In an after hours news release issued yesterday evening, the firm identified that sales of recreational and medical cannabis had been put on freeze as a result of this weeks news related to the company growing in unlicensed space at their Pelham facility.

Referring to it as a voluntary hold on sale, the firm provided no insight on when they anticipate to resume shipping product to consumers. CannTrust also declined to state any anticipated financial impact from the ordeal.

While difficult to determine the true financial impact of the ordeal related to growing illicit cannabis in an unlicensed portion of their facility, there are certain figures that can be examined to help get a sense of how deep CannTrust will be into this mess.

First and foremost, is the value of the cannabis currently placed on hold.
With Health Canada placing 5,200 KG of product on hold and CannTrust placing a further 7,500 KG on voluntary hold, the base financial impact is easy to determine. Using CannTrust’s average selling price of $5.47 per gram for the first quarter of 2019, this implies $69.469 million in inventory has to be potentially destroyed by the company. The true impact figure could be higher dependent on how much of that product is in kilogram equivalent oils and other products.

While many are quick to point out that 12,700 KG is a fraction of anticipated capacity by the end of 2019, the firm only harvested 9,400 KG of cannabis during the first quarter, indicating that an entire quarters production may have to be eliminated. CannTrust had 7,582 KG of dry cannabis and 10,432 KG of cannabis extract products in inventory as of March 31.

Then there’s the impact of ceasing product sales until an undetermined date. Selling just over 3,000 KG of cannabis products in the first quarter of 2019, CannTrust netted $16.85 million in sales for the first quarter. Averaged out across the 90 days included in the quarter, it works out to roughly $187,256 in sales per day.

Thus, it can be said that CannTrust is losing an estimated $187,000 for every day in which it continues to refuse sale of its product due to the Health Canada nightmare it has found itself in. With an undetermined resumption of sales date, the financial impact will quickly climb into the millions before Health Canada’s decision is even taken into consideration.

The one variable in terms of financial impact, is pending lawsuits. As can be assumed at this point, a number of class action lawsuits are looking to be filed against the company. With CannTrust conducting a raise to the tune of US$170 million during the period in which it was producing cannabis illegally, there will undoubtedly be a significant financial impact from pending legal troubles. Conducted at $5.50 US per share, as of the time of writing the value of the US$170 million in shares sold via the raise is currently pegged at US$83.45 million – a haircut to investor pocketbooks by all means.

Mixed with the indictable offence of shipping illegal cannabis product overseas to Denmark via its partnership with Stenocare, the outlook for CannTrust Holdings has become bleak. Many investors are now at the point of attempting to calculate the value of the firms hard assets in the event that the company’s licenses are revoked for the cultivation and sale of cannabis.

What isn’t being widely considered however, is the impact that this action has and will continue to have on other licensed producers in the sector. While CannTrust’s debacle has dragged down the equity prices of most Canadian producers, the long term impact in the form of potential client and revenue growth has not overly been considered for producers operating within Health Canada guidelines.

With more than 72,000 current clients for medical cannabis, these users will be in search of a new firm to fill their prescription. Given the fact that CannTrust was known for producing high quality product, it might finally be the time for high quality producers to shine as patients search for new sources of quality cannabis.

While it will take time for much of this financial impact to play out, the impact is expected to be significant for shareholders. It should be noted that the debacle also commenced at the start of the third quarter, meaning CannTrust’s second quarter, which is the next quarter to be reported, will show no impact from the blunder. The start of the financial hardship for CannTrust as a result won’t be known by investors until roughly November 14, 2019 based on reporting periods for the issuer.

CannTrust Holdings is currently trading at $2.71 on the New York Stock Exchange.

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.