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CannTrust Updates on Its Recovery Plan

CannTrust Holdings (CTST) provided Health Canada with updates on its recovery plan on October 21. The plan detailed the steps the company has outlined to address the cannabis compliance issues Health Canada raised. CannTrust expects to complete all these steps by the end of the first quarter of 2020.

In the wake of the release of CannTrust’s recovery plan, John Kaden resigned from his position as director of the company’s board on October 28.

History of CannTrust’s license cancellation

CannTrust lost its license last month after breaching Canadian cannabis regulations. It had been using unlicensed rooms to grow thousands of kilograms of cannabis, which federal regulators uncovered during an inspection. This resulted in the suspension of the company’s licenses by the Canadian government.

CannTrust has received a full suspension of its licenses to produce, process, and sell cannabis products. However, it can harvest its existing plants. This suspension will remain in effect until the reason for it is resolved.

Special Committee’s investigation

A Special Committee was formed after CannTrust received Health Canada’s report of noncompliance. The committee’s mandate involved completing a stand-alone investigation to identify the reasons for CannTrust’s regulatory noncompliance. Its mandate also involved creating a plan to address these problems. Additionally, it had to provide oversights for actions to make the company compliant with regulations and evaluate strategic alternatives for the company.

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The Special Committee’s conclusion included an unbiased review of CannTrust and interviews with senior management, the board of directors, and employees. The committee recently submitted its findings to Health Canada and CannTrust.

Mark Dawber, Chair of the Special Committee, said, “Over the past three months, the Special Committee has worked tirelessly with its legal counsel and other professional advisors to complete a thorough and independent investigation.”

Details included in CannTrust’s progress update

CannTrust expects to complete all the outlined activities in its comprehensive plan for remediation to Health Canada by the first quarter of 2020.

CannTrust’s board of directors has already accepted the findings of the Special Committee’s fair review. Additionally, it’s made a temporary reduction in its head count due to its reduced operations following the suspension.

CannTrust has also provided its anticipated timeline for filing its financial statements.

Streamlining its workforce

CannTrust is resizing its workforce temporarily. As the suspension of its licenses has resulted in significantly reduced operations, this action will result in its maximizing efficiency and maintaining a strong balance sheet. The company aims to reduce its workforce by 140 people—approximately one-quarter of its current workforce.

CannTrust will lay off its employees in a phased manner over the next three months. Management believes this action is prudent due to reduced operations. This head count reduction will result in $0.4 million worth of savings for the company. If it doesn’t call its employees back in 35 weeks, it will incur $0.8 million in severance charges.

Restated financial statements

CannTrust must refile its restated audited financial statements and their respective discussion and analysis by management. The company must submit its annual financial statements for the year that ended on December 31, 2018. Additionally, it has to submit all its recent interim financial reports. Currently, CannTrust is working with professional advisors to refile this information in the given time.

CannTrust is preparing to submit these required statements within the next 60 days, though the actual timing may be affected by other events in the interim. Until the company fulfills its obligation by submitting its restated financial statements, National Policy 12-203 will apply. Under this policy, the company has to provide biweekly updates. This requirement ceases when it has completed all its obligations under Canadian securities law.

Immediate measures

According to CannTrust’s news release on October 14, the company destroyed $12 million worth of unauthorized biological assets, and it will further destroy another $65 million worth of inventories. The company will also take the necessary steps to recover its unsold inventories from dispensaries and retailers. The remediation plan also includes details about an extensive internal training program and structured corporate governance.

Robert Marcovitch, CannTrust’s chair and interim CEO, said, “The Company has already made significant progress in this regard, and is committed to completing all of the remediation actions outlined in the plan.” He also said that CannTrust’s goal is to rebuild regulators’ and customers’ trust.

The company has anticipated and planned its timeline for completing the remediation and filing the restated financial statements. However, the actual submission times will depend on Health Canada’s approvals and inputs. For this reason, CannTrust will be working collaboratively with Health Canada for the foreseeable future.

CannTrust stock is trading at $1.45 as of 1:10 PM ET today. It’s fallen 18% since it released its recovery update on October 21.

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