CannTrust warns of shortages after regulator flags greenhouse for non-compliance

CannTrust Holdings Inc. warned of product shortages Monday after Health Canada flagged its Niagara-area greenhouse for growing cannabis in rooms not licensed by the regulator and the majority of the pot producer’s inventory was put on hold as a result.

Roughly 5,200 kilograms of dried cannabis, which was harvested from five unlicensed rooms and put on hold by Health Canada, and the 7,200 kilograms in pot products which CannTrust voluntarily put on hold represents the “majority” of its inventory, chief executive Peter Aceto said.

CannTrust’s other inventory on hand amounts to “several days worth of supply,” Aceto said in an interview, noting that the company continues to grow, cultivate, harvest and sell cannabis.

The firm has a team working to source cannabis to fill supply gaps while external advisers conduct a review to determine how this happened, Aceto added.

“CannTrust is clearly acknowledging that mistakes were made here… This is a high priority for us to correct these mistakes, particularly with Health Canada,” he said. “We’ve got a very clear process in place in order to get ourselves back into compliance as quickly as we possibly can.”

CannTrust shares plunged as much as 22 per cent on Monday after it said it had been notified by Health Canada that its greenhouse in Pelham, Ont. was non-compliant with certain regulations.

The shares were down $1.32 or roughly 21 per cent at $5.14 in mid-afternoon trading on the Toronto Stock Exchange after falling as low at $5.03 just after the market opened.

The company said the growing in the unlicensed rooms took place from October 2018 to March 2019 when it had pending applications for the rooms with Health Canada. Licences were issued for each of the five rooms in April 2019.

The company said Monday the ruling was based on observations by the regulator regarding the growing of cannabis in five unlicensed rooms and “inaccurate information” provided to Health Canada.

Aceto said Health Canada came to its facility for an inspection in June, during which the inaccurate information was provided to the regulator. CannTrust received Health Canada’s inspection report on July 3.

He said it is unclear at this stage what transpired, but CannTrust has hired an external firm to conduct a “root-cause analysis,” and determine how this occurred.

One employee who worked at the Niagara-area facility has been terminated, but Aceto would not say what role that person held.

CannTrust also said Monday it has voluntarily advised Health Canada of “issues that may impact compliance at its Vaughan facility regarding product storage.”

The company said the impact of these matters on CannTrust’s financial results are unknown until Health Canada completes its quality testing of the held-back product from its Pelham greenhouse. Results are expected in 10 to 12 business days.

Canaccord Genuity analyst Derek Dley said the breach of regulations will likely impact its upcoming quarterly results in a material way.

“We believe it is highly likely the company will be forced to destroy the product that was produced within the non-compliant grow rooms,” he said in a note to clients.

However, Dley added that it believes this is a “one-time issue” and the company is “working diligently to ensure it can rectify the situation.”

Ryan Tomkins, an analyst with Jefferies, said in the near-term there will “undoubtedly be a financial impact.”

“They will have to go to the open market to fill the shortage gap with little bargaining power which means they could pay inflated prices or take inferior product which could lead to lost market share,” he said in a note to clients.

In the long-term, there will be an impact on CannTrust’s credibility, Tomkins added.

“The fact the company never spotted this, or indeed still doesn’t know how it happened, is a concern,” he said.

“For us, this will make institutional investors think twice, and could also likely make it harder for CannTrust to attract high quality” partnerships with consumer-packaged goods companies.