The CannTrust Scandal: 5 Thoughts From a Shareholder

The cannabis attention could really good be this generation’s biggest expansion story. With probably each Wall Street projection job for a double-digit commission devalue annual expansion rate over a subsequent decade, lofty pot batch valuations could shortly infer inexpensive if legalizations and organic expansion continue.

But we’ve also schooled that a maturation of a pot attention won’t be though a bumps in a road. Having already witnessed scandals stone Namaste Technologies and Aphria (NYSE: APHA), Ontario-based CannTrust Holdings (NYSE: CTST) assimilated a indeterminate list progressing this week.

A cannabis root laid within a Canadian flag's red maple leaf, with rolled joints and a cannabis blossom to a left of a flag.A cannabis root laid within a Canadian flag's red maple leaf, with rolled joints and a cannabis blossom to a left of a flag.

Image source: Getty Images.

CannTrust spills a beans on a blatant noncompliance

Prior to a opening bell on Monday, Jul 8, CannTrust announced that a flagship Niagara hothouse (located in Pelham, Ontario), that specializes in hydroponic production, was found to be noncompliant by Health Canada, a regulatory group that oversees a pot industry. More specifically, CannTrust certified that it was flourishing (and selling) cannabis out of 5 bedrooms between Oct 2018 and Mar 2019 that were, during a time, unlicensed. These 5 cultivation bedrooms perceived their correct chartering from Health Canada in April.

As a outcome of these commentary — and CannTrust’s acknowledgment of indiscretion — Health Canada has placed a reason on 5,200 kilos of dusty cannabis that was harvested during a Niagara trickery until such time as it deems that CannTrust is agreeable with Canadian cannabis regulations. The association has also instituted a intentional reason on 7,500 kilos of cannabis-equivalent prolongation (i.e., this might embody oils or other derivatives that were subsequent from these unlawful rooms) being hold during a most smaller Vaughan facility.

The press recover does note that both a Vaughan and Niagara comforts sojourn entirely licensed, and that CannTrust continues to grow, harvest, and sell cannabis from both campuses. Health Canada is, however, conducting peculiarity checks on a now hold cannabis from Niagara, with a formula approaching behind in 10 to 12 business days (July 22 to Jul 24). 

Shares of CannTrust righteously fell 22% on a day of a announcement.

A businessman holding a pointer full of doubt outlines in front of his face.A businessman holding a pointer full of doubt outlines in front of his face.

Image source: Getty Images.

Five thoughts from a CannTrust shareholder

As a stream shareholder in CannTrust, we openly acknowledge that this was unexpected, and that it’s positively no fun being hold adult in a association that admits to trimming attention regulations. Here are 5 of my thoughts as a shareholder now that I’ve had time to digest this announcement.

1. Peter Aceto has to go

I don’t come to this preference lightly, though CEO Peter Aceto has to be shown a doorway and new care sought out. Said Aceto in a press release:

Our group has focused on building a enlightenment of transparency, trust and value in each aspect of a business, including a interactions with a regulator. We have done many changes to make this right with Health Canada. We done errors in judgement, though a lessons we have schooled here will offer us good relocating forward.

His acknowledgment of “errors in judgement” suggests that he knew a association was subverting Canadian cannabis regulations. Further, a company’s acknowledgment of noncompliance demonstrates a miss of clarity and trust. With both Namaste and Aphria interruption with their CEOs following their particular scandals, it seems judicious that CannTrust will partial ways with Aceto in due time.

A transparent jar packaged with dusty cannabis buds that's seated atop a fanned raise of twenty dollar bills.A transparent jar packaged with dusty cannabis buds that's seated atop a fanned raise of twenty dollar bills.

Image source: Getty Images.

2. Margins are going to mellow in a nearby tenure

Prior to this announcement, CannTrust was already traffic with rising expenditures tied to expanding Niagara, and purchasing/leasing land in an try to get a vast outside grow operation off a ground. In other words, a margins weren’t accurately streamer in a right direction, during slightest in a brief term.

With a proclamation that 5,200 kilos of register is being hold by Health Canada, and that another 7,500 kilo-equivalents is being hold behind during Vaughan, a press recover records that certain business (likely to embody Canadian provinces) could face proxy supply shortages. This is flattering most formula for “we’re going to buy indiscriminate cannabis to make adult for a shortage.” Tilray has been shopping indiscriminate pot to make adult for a possess flourishing shortages, and that’s been wreaking massacre on a margins. we trust most of a same could be approaching for CannTrust via a residue of 2019.

3. This isn’t a concrete volume of prolongation in doubt

While no volume of noncompliance is acceptable, investors should also know that this is a tiny commission of CannTrust’s prolongation intensity on a grander scale. When entirely operational, CannTrust should be generating around 100,000 kilos a year, combined, from Vaughan and Niagara, with an additional 100,000 kilos to 200,000 kilos a year from a outside grow operations. Some of this outside grow should breeze adult in protected dispensaries, though most of it will be used for descent functions to emanate derivative products.

In total, a 12,700 kilos of kilo-equivalent prolongation set aside right now usually seems like a lot of cannabis since no growers are anywhere nearby full capacity. A year from now, it’ll be a comparatively tiny commission of sum annual output.

A judge's gavel subsequent to handful of dusty cannabis buds.A judge's gavel subsequent to handful of dusty cannabis buds.

Image source: Getty Images.

4. I’m watchful for a gavel to dump before we make a pierce

Although CannTrust shares have declined from where I primarily purchased them in early May, I’m not prone to buy some-more only yet.

I do trust a association offers copiousness of value given a perfect prolongation potential, concentration on derivatives, supply agreements in Canada, and new proclamation of a pull into a U.S. cannabidiol market. But we don’t nonetheless know what arrange of punishment could be levied by regulators for a company’s blatant negligence for chartering regulations. My personal theory is that CannTrust will face a fine, be postulated behind a hold cannabis, and afterwards design additional inspections from Health Canada relocating forward. However, it could take weeks before we get any arrange of clarity on this situation.

5. Don’t be astounded if a low-ball offer emerges

Last, though not least, don’t be repelled if another pot batch swoops in with a low-ball offer to acquire CannTrust.

For those who might not recall, Green Growth Brands (NASDAQOTH: GGBXF) directed to gain on Aphria’s set-back with an all-stock antagonistic bid nearby a commencement of a year. In a three-month duration between early Sep and a commencement of December, Aphria wound adult losing about two-thirds of a value, that was culminated in a short-seller report that purported a association had overpaid for a Latin American assets. As Canada’s projected third-largest grower, Green Growth Brands attempted to swoop in and cackle adult a beaten-down Aphria during a discount price. Eventually, Green Growth’s bid was incited down.

It won’t be startling if a low-ball offer emerges for CannTrust, depending on a outcome of Health Canada’s findings.

More From The Motley Fool

Sean Williams owns shares of CannTrust Holdings Inc. The Motley Fool recommends CannTrust Holdings Inc. and Namaste Technologies. The Motley Fool has a disclosure policy.

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