The Clouds Are Getting Darker for CannTrust (CTST) Stock

A Health Canada report has only served to reinforce the uncertainty over CannTrust (CTST). The stock surged back over $3 on Friday to only swoon 25% to start the week as a report from the cannabis regulatory body provided no assurances for CannTrust. Investors need to remember that the stock is still worth $450 million with all cannabis products still on a voluntary hold questioning whether CannTrust has any value.

Health Canada Audit

By now, CannTrust expected to be on the path to growing outdoor cannabis and producing a crop of up to 75,000 kg and total capacity reaching 200,000 kg in 2019. The Health Canada report sent to the company after hours on Friday only appears to detail more audit problems with no real solution in the works.

Not only did CannTrust grow cannabis in unlicensed grow rooms and attempt to evade the regulators during a routine audit, but also the company failed to provide sufficient security, adequate quality assurance controls and operating procedures along with a failure to retain documents necessarily to complete the audit in a timely manner. The company has encountered so many problems that CannTrust has hired independent consultants to help meet these regulatory requirements.

So much for the Canadian cannabis company only attempting to evade auditors while waiting for official license approval for the grow rooms from the regulatory body. The recent pulling of the auditors reports by KPMG suggests inventory levels listed in the quarterly statements weren’t accurate, amongst other potential issues.

Investors shouldn’t rely on any of the past statements from the company that originally led the market to believe Health Canada would provide details within 12 business days over a month ago. Ultimately, the lack of guidance on a possible solution to the regulatory headaches other than attempting to resolve these other non-compliant issues is a major problem for investors.

Wounded Giant

The Ontario-based company had recently raised $170 million in gross proceeds via an equity offering so at least cash isn’t an immediate issue. The problem here is the unknown costs for legal fees, Health Canada fines, shareholder lawsuits and the current cash burn to keep the operations going while the company isn’t selling any cannabis products.

CannTrust had an aggressive plan to expand cannabis production in Canada. The company was headed towards 50,000 kg of greenhouse output in Q3 with an outdoor grow area in full production mode. The ultimate goal was to reach a 2020 production exit rate of 200,000 kg to 300,000 kg per year.

The company only sold 3,000 kg of dried flower in Q1 showing the substantial upside opportunity. By the end of 2020, CannTrust could produce 75,000 kg of cannabis in Canada on a quarterly basis plus have a sizeable hemp-based CBD operation going in the U.S.

The problem here is not knowing whether the company will get licenses approved for new facilities such as the outdoor grow sites. Or whether the company will have the capital to finish expansion plans.

Adding insult to injury, Eight Capital analyst Graeme Kreindler reiterated a Sell rating on CannTrust stock with a C$2.00 price target, which implies nearly 40% downside from current levels. (To watch Kreindler's track record, click here)

Takeaway

The key investor takeaway is that CannTrust is a wounded giant in the making that Health Canada could still chop off at the knees. An investor needs more certainty to make an investment with the stock more of a gamble with a binary outcome depending on the unknown Health Canada ruling. The best option is for investors to remain on the sidelines pending further details from Health Canada.

Disclosure: No position.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

See CTST's price targets and analyst ratings on TipRanks

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