CannTrust is not out of the woods yet, says Paradigm Capital

In an update to clients on Tuesday, Paradigm Capital analyst Corey Hammill said investors need to be patient when it comes to beleaguered pot company CannTrust Holdings (CannTrust Holdings Stock Quote, Chart, News TSX:TRST), which just announced a remediation plan to get back in the good books of Canada’s cannabis regulator.

Shares of CannTrust were up sharply on Tuesday with the company’s announcement that it “continues to make significant progress” to become fully compliant with Health Canada in aid of getting the regulator to reinstate its licenses to produce and sell cannabis. The Vaughan, Ontario-based company said that it will be destroying $12-million worth of biological assets and $65-million in inventory including product returned by patients, distributors and retailers, all as a result of TRST’s being found earlier this year to have been growing cannabis in unlicensed facilities.

“CannTrust is confident that its detailed remediation plan will not only address all of the compliance issues identified by Health Canada, but it will also build a best-in-class compliance environment for the future,” said Robert Marcovitch, the Company’s interim CEO, in a press release on Monday. “We have already made significant progress in these efforts. Our goal is to meet and exceed Health Canada’s regulatory standard and to rebuild the trust and confidence of our primary regulator, investors, patients and customers.”

Other measures the company said would be enacted include improving key personnel’s knowledge of and compliance with Health Canada’s regulations and improving record-keeping and inventory practices. CannTrust said that it will have a detailed remediation strategy submitted to Health Canada on or before October 21.

CannTrust Holdings: analyst Corey Hammill says stay on the sidelines…

Hammill called the announcement a step forward but argued that it doesn’t bring any further clarity to CannTrust’s situation, as much will depend on Health Canada’s response.

“A lot has transpired since CannTrust received a non-compliance report from Health Canada for its Niagara cultivation facility on July 8. The company has fired its CEO (Peter Aceto) and Chairman (Eric Paul), has been the subject of many class action lawsuits, and has lost ~85 per cent of its equity value. What was once an industry leading, low-cost Canadian LP and a clear-cut leader in the medical market has become the poster child for negative sentiment that has crept into the cannabis space,” writes Hammill.

“In the best case scenario, Health Canada accepts CannTrust’s plan and moves to reinstate its license. A major outstanding issue remains the pending US class action lawsuits resulting from the illegal growing activity. Recall CannTrust is dual listed and completed a ~US$200-million equity financing in May at US$5.50. Shares closed Monday at US$1.06,” he writes.

“We recommend investors remain on the sidelines, looking at other Canadian LP’s,” Hammill says.

Health Canada suspended CannTrust’s growing and processing licenses on September 17, three months after it found that CannTrust had been growing cannabis in unlicensed rooms in its Pelham, Ontario, facility, with apparent attempts to conceal the plants from inspectors. Regulators subsequently found the company in breach of regulations at its Vaughan, Ontario, facility.