• CannTrust didn’t comply with Health Canada’s regulations.
  • The company suspended all of its product sales.
  • CannTrust’s revenues and profitability are in trouble in the near term.
  • The company’s license might get suspended, which could take its price below $1.

Last week was a nightmare for CannTrust (CTST) and its investors. The stock lost almost 50% of its value in the week ending July 12. On July 8, the company reported that its facility in Vaughan, Ontario, didn’t comply with Health Canada’s regulations. In 2018, the company repurposed the facility, which consists of about 60,000 square feet.

Non-compliance cost

Among the non-compliant activities, CannTrust grew cannabis in five unlicensed rooms at the Vaughan facility. The company’s employees also gave Health Canada inaccurate information. As a result, Health Canada put a hold on the sale of 5,200 kilograms of cannabis products. CannTrust volunteered to put a hold on the sale of an additional 2,300 kilograms, which brought the total to 7,500 kilograms.

CannTrust announced that it would suspend sales related to all of its medical cannabis products. We don’t know how long the company will place a hold on its products. In a press release, CannTrust stated that it “is working closely with the regulator through the review process.” The company added that it “expects to provide further detail of the duration of the hold and other developments as they become available.”

Two scenarios

What does all of this mean for investors that placed their bets on CannTrust stock? Overall, we see two scenarios for the company. First, investors could expect a long holding period before things get back to normal. CannTrust would need to comply with Health Canada’s regulations to start selling its products. Even if Health Canada clears the company, restoring the brand image would take time. To learn more, read Investing in the Cannabis Industry.

Second, all of the recent events could impact CannTrust’s near-term revenues and its growth trajectory. The company would need time to regain its profitability. Most cannabis companies invested upfront in expansion facilities. Investing upfront was necessary to gain market share quickly. However, the cost to invest upfront resulted in losses for these companies.

In the first quarter of 2019, which ended on March 31, CannTrust reported an adjusted EBITDA of -3.7 million Canadian dollars. The company needed its future sales to be profitable. Canopy Growth reported a negative EBITDA of 335 million in its recent quarter. Aurora Cannabis’s EBITDA fell by 79 million in the most recent comparable quarter.

CannTrust might lose its license

In a related development, Bloomberg reported that CannTrust might lose its license. The report cited Charles Taer, the CEO of Faircourt Asset Management—a hedge fund that invests in cannabis stocks through its Ninepoint Alternative Health Fund.

CannTrust’s value will fall if it loses its license. A lower value would erase the potential to make money from investments in building capacity. The company could sell its facility to existing players. However, CannTrust might struggle to sell a non-compliant facility. If CannTrust loses its license, its stock might fall below $1 in the coming days.

Corporate governance issues

Our biggest complaint with the cannabis industry is its corporate governance practices. Not all of the industry participants have weak corporate governance. However, such events dampen investors’ mood. For more analysis, read CannTrust and a Big Problem Nobody’s Talking About.

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