Canada Markets close in 4 hrs 49 mins

CannTrust (TSX:TRST) Busted Again: Avoid it Like the Plague

Christopher Liew, CFA
Red siren flashing

After Aphria announced its financial earnings for the 2019 fiscal year this month, you might have been curious about the performance of CannTrust (TSX:TRST)(NYSE:CTST). Unfortunately, you will be bitterly disappointed by the company after it started to face problems with regulators and its stock plummeted.

What happened with CannTrust?

The dominoes began to fall when CannTrust applied for a management cease trade order on August 1, 2019. The company did so because it seemed likely that it would not be possible to file interim financial reports by the August 14th deadline. CannTrust was responding to a health inspection carried out by Health Canada between July 10 and July 16 this year.

Health Canada would come to rate the company’s facility in Vaughan, Ontario, as non-compliant. The July inspection by Health Canada revealed that its facility was using five rooms for storage that were previously used for operations. CannTrust was also constructing two new areas for storage.

The company had neither sought approval for these new constructions nor the re-purposing of operational areas for storage. That was in addition to more non-compliance issues found in its greenhouse facility in Pelham, Ontario, previously.

Health Canada thus placed a hold on 5,200 kg of cannabis harvested in Pelham and CannTrust voluntarily placed a hold on an additional 7,500 kg from Vaughan.

To add to the company’s woes, its auditor, KPMG, withdrew its endorsement of CannTrust financial statements for the 2018 fiscal year. In a statement, KPMG stated that the financial documents by the company should not be relied upon after a special committee uncovered new information.

What does all of this mean for CannTrust?

The most obvious impact from all the above mishaps has been to the company’s stock. Since Health Canada first reported non-compliance at CannTrust facilities in July, the company’s stock has dropped by more than 60%.

With the withdrawal of KPMG, there is no reliable information on the company’s latest financials even though trading is still ongoing. By applying for a management cease trade order from the Ontario Securities Commission, the order only prohibits management, directors, and other insiders from trading the company’s stock.

You are still free to trade as usual both on the TSX and NYSE. The NYSE noted that failing to file its 2018 annual report by the August 14th deadline might lead to a halting of trade after six months.

Should investors be worried?

One of the biggest problems to consider is that this isn’t the first time CannTrust have been found violating the law. The special committee investigating circumstances surrounding the non-compliance findings by Health Canada discovered a lot of new information.

There are uncovered emails that revealed management’s knowledge of the illegal grows in the company’s facilities, and that the company had nevertheless exported the product. This led to the removal of CEO Peter Aceto and Chairman Eric Paul on July 25.

Another problem you must keep in mind is the company’s financials. In March, CannTrust reported a net loss of $25.5 million for the fourth quarter of 2018 fiscal year. Many institutional investors were hoping that the company would be edging closer to profitability, but instead, the company reported a much higher loss than anticipated.

Remember, this was despite recreational marijuana being legalized in the fourth quarter of 2018. Worse still, the company was planning to spend even more on acquiring new land, about 200 acres, for outdoor growing.

In conclusion

For these reasons, CannTrust seems to be an unfavorable investment, and short-sellers are increasing their bets. The latest regulatory troubles only exacerbate the problems for the company, making it a strong sell for speculators and a no-go for you.

More reading

Fool contributor Christopher Liew has no position in any of the stocks mentioned.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Motley Fool Canada 2019