CannTrust still under pressure as its deadline to respond to Health Canada looms

The regulatory uncertainty that has engulfed CannTrust Holdings Inc. (TRST.TO) has prompted an analyst to throw in the towel on the Vaughan, Ont.-based cannabis producer.

Greg McLeish, director of equity research at Mackie Research Capital Corp., terminated coverage of CannTrust on Monday, saying “we have lost faith in management” amid uncertainty about the company’s future after recent regulatory infractions. The decision to abandon coverage came four months after McLeish downgraded the stock to “market perform”.

Last week, CannTrust disclosed it received a non-compliance report from Health Canada after the company’s greenhouse facility in Pelham, Ont. was found to be growing cannabis in five unlicensed rooms between Oct. 2018 and March.

As a result, Health Canada placed a hold on 5,200 kilograms of dried cannabis from the site, and CannTrust voluntarily placed a hold on an additional 7,500 kilograms of inventory that was produced in the unlicensed rooms. The company has also suspended all sales of its medical and recreational cannabis products "as a precaution" while its board of directors established a special independent committee to investigate the foul-up.

At least nine analysts have lowered their price target or downgraded their rating on CannTrust since the initial disclosure last Monday, and the company’s shares lost almost half their value last week.

In his note to clients, McLeish stated that Health Canada must “come down hard” on CannTrust if it wants to maintain any credibility. The regulator could potentially revoke the company’s cannabis production licence or issue a fine of up to $1 million.

“We believe that Health Canada must make an example of CannTrust following its failed Health Canada audit. If Health Canada does not come down hard on the company it will set a bad precedent for other ‘law abiding’ industry participants,” he said.

McLeish added the failed Health Canada audit will likely jeopardize CannTrust’s ability to obtain an outdoor cultivation licence and said there are also concerns about its financial accounting.

“Did this unlicensed product show up in inventory or biological assets or was it even accounted for at all? If it did show up, why didn’t senior management identify a potential problem?” McLeish wrote in his report.

CannTrust has until July 18 to respond to Health Canada's inspection report. Health Canada will then take an unspecified amount of time to decide what enforcement action to take, saying in a recent statement to BNN Bloomberg that the “length of time required to conduct each [investigation] will depend on the size, and complexity of the site inspected.”