Almost everyone interested in the cannabis sector has heard about the news that CannTrust (CTST) was found growing cannabis in unlicensed rooms, resulting in the company stopping all sales and shipments of its products until the matter is cleared up.
Not only will this significantly slash its performance in this quarter at least, but there are a number of other consequences to consider that could have a long-term impact on the company, such as a growing number of lawsuits and the possibility of having its its license in Canada suspended, or worse, canceled altogether.
Narrative getting worse
Initially company management didn’t take all the blame for being found non-compliant concerning the five rooms in its Niagara greenhouse that were illegally growing cannabis.
They said in a press release that the report was “based on observations by the regulator regarding the growing of cannabis in five unlicensed rooms and inaccurate information provided to the regulator by CannTrust employees.”
Since the initial reports it has come out that at least one former employee was asked to put fake walls up in order to hide the plants from the regulator. Staged photos resulted in the regulator not having a visual of the plants.
As I write there are 14 known lawsuits filed against the company, which will keep the debacle in the media, and a growing concern the lack of supply as a result of the company freezing sales and delivery will further harm the Canadian market specifically, and produce a lack of trust for the cannabis sector in general.
Investors alone won’t forget the actions, neither will their peers, who have also suffered from the negative fallout surrounding the actions of the CannTrust.
Do fundamentals remain in place?
One thing that all investors should ask after situations like this concerning a company is: “are the fundamentals of the company still in place?” The answer at this time is no, in the short term, and impossible to tell in the long term.
In the short term the company is going to get savaged. It’s next earnings report will be a disaster, assuming the company retains its licenses. Even in the near term we have no idea how long the company will have to hold onto its product without delivering it.
For the long term there could be stiff fines from Canadian authorities, costly lawsuits that could result in huge payouts, and as already mentioned, the potential loss of its licenses.
Also, over the long haul, a lot of companies or provinces won’t want to do business with CannTrust because of being tainted by association with the company.
At the international level, we already know Denmark received some of the unlicensed product, and that could have a ripple effect in Europe, which could also have a negative impact on the company.
Conclusion
It’s inexcusable that CannTrust had this happen to them, and at some levels, participated in the cover up by hiding the plants in a photo op.
In the short and long term I think it’ll be very hard for the company to recover in any sustainable manner.
At this time I’m not convinced the company will have its licenses canceled, but with the numerous other pitfalls that have come as a result of its breaking the rules, it’s going to be a long time before it fully recovers.
All of this is happening at a time CannTrust should have been ramping up production in its facilities.
As for profits and performance, this has seriously set back the company for a prolonged period of time. This isn’t going to go away anytime soon, and the monetary consequences are yet to be determined; they could be formidable.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: No position.
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