CannTrust (CTST) is looking more like "Can't Trust" this week.
When news about the Canadian cannabis name broke this week, I reached out to the company on Wednesday (no response) and followed-up on Thursday, which generated a call from their PR firm. In less than a minute, it became clear to me that CannTrust is caught in the same Catch-22 many spiraling companies find themselves, especially when dealing with regulators or quiet periods: they simply can't say anything.
Let's do a very quick recap.
On July 8, the company announced it received a notice from regulator Health Canada that its greenhouse facility in Pelham, Ontario was not in compliance. Between October 2018 and March 2019, the company produced cannabis in five unlicensed grow rooms. Health Canada placed a hold on 5,200 kg of dried cannabis harvested from these rooms and CannTrust placed a voluntary hold on another 7,500 kg of dried cannabis previously produced in those rooms.
By the end of the day on July 9, CannTrust shares received four downgrades and a slew of law firms announcing an investigation with the intent of filing a class action lawsuit.
On Thursday, a report from The Globe & Mail hits. According to a whistleblower, Health Canada would have never known what to look for had he not tipped them off. The potential devastating portion of the email outlines how a manager at the facility allegedly instructed the whistleblower to help erect fake walls to conceal the illegal growing.
After the close Thursday, CannTrust announced it has implemented a "voluntary" hold on the sale and shipment of all cannabis products as a "precaution" while Health Canada reviews the Vaughan, Ontario manufacturing facility. It also formed a Special Committee of the Board of Directors to investigate the matter.
As a reminder, current CEO Peter Aceto, accepted that role on Oct. 1, 2018.
There's a lot to unpack here.
With Aceto just coming into his role at the beginning of October, it would be a bold move for a brand-new CEO to institute allegedly illegal growing as one of their first acts in leadership. Given the challenges associated with obtaining Pelham approval, I have a difficult time believing Aceto had any knowledge initially. It's likely he had no knowledge at all. But is that a good thing? Does it give the picture of a CEO out of touch or one "protected" by those in the know?
These are all personal opinions and none of the answers are good ones, but my belief is Aceto did not know. Whether he has a position with CannTrust after all this is another story.
The challenge for investors is they are going to hear rumors and the company can't really respond. By responding, they risk violating any potential discussions they've had with Health Canada (or even irritating Health Canada). By not responding, we'll likely hear rumors of suspended licenses or the company having their license revoked.
While the rumors may come to fruition, the loss of clients is my primary concern. As of March 31, 2019, the company had 68,000 medical cannabis patients. If this hold on product sales continues for too long, those patients are going to seek product elsewhere and chances of CannTrust getting them back will significantly decrease each day that passes.
Furthermore, in early May, the company sold 36.36 million shares at $5.50 per share in a secondary offering. Given the timing of the illegal growing, one has to worry about a clawback. That's a major concern here.
While I would love to scoop up a cheap stock on an overreaction, there are too many flags here. Yellow flags, red flags, white flags of surrender, black flags of death, and just about every other negative color imaginable.
Until we have more clarity, if you want to be involved in the space, I'd take advantage of the widespread carnage in the space we're seeing because of CannTrust. That is, as long as you have patience.
There's no telling how deep the selloff could run, so I would ease into names. It's definitely ugly out there.
