CannTrust down 15% premarket on negative regulatory audit

Cannabis stocks down

CannTrust's share price declined over 20 percent after Health Canada found the company guilty of growing cannabis product in unlicensed rooms.

The hold may be lifted if Health Canada deems the company compliant with regulations, but until that decision has been made official CannTrust has put about 7500 kg of dried product from its Vaughan facility - grown in the unlicensed rooms - on a voluntary hold.

The announcement is "somewhat unprecedented" for a cannabis company selling to the legal market, and CannTrust may be forced to destroy all the product in question, Brochstein said. Although Health Canada could clear some or all of its stock for sale if it passes quality tests, the majority of CannTrust's inventory is now on hold.

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 it is exploring options to mitigate these shortages.

The cannabis producer appears to have taken a "shortcut" in reaction to the slow licensing process in Canada, Brochstein said during Benzinga's PreMarket Prep show Monday. Beyond the regulator product hold, the firm is instituting its own hold on 7,500 kilograms of dried cannabis that was produced in the unlicensed rooms.

"We made errors in judgment", Chief Executive Officer Peter Aceto said.

CannTrust said it has implemented some corrective actions, such as the retention of external advisers for an independent review of its compliance process and it has voluntarily advised Health Canada of "issues that may impact compliance at its Vaughan facility regarding product storage".

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Any forward-looking information and statements speak only as of the date on which they are made, and, except as required by law, CannTrust does not undertake any obligation to update or revise any forward-looking information or statements, whether as a result of new information, future events or otherwise.

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

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".

Health Canada also pointed to awry information shared by employees of the company.

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

Note to readers: This is a corrected story.

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