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Report on Business CannTrust shares plunge as pot producer runs afoul of Health Canada for second time

CannTrust's Vaughan, Ont., site, seen on Aug. 12, 2019, was originally its main growing facility, but has been largely repurposed into lab and warehouses space.

Tijana Martin/The Globe and Mail

Cannabis grower CannTrust Holdings Inc. broke multiple federal rules at its manufacturing facility in Vaughan, Ont., the company said on Monday as it acknowledged a second Health Canada sanction for unlicensed activity.

The latest infractions came to light during inspections in July. The federal regulator found CannTrust was storing cannabis in rooms that were not licensed for storage and had built two new areas of the facility without approval. Inspectors also found insufficient security, inadequate quality-assurance protocols and poor record-keeping at the Vaughan site, CannTrust said.

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Health Canada’s non-compliant rating comes five weeks after federal inspectors determined CannTrust had broken rules at its greenhouse complex in Pelham, Ont., by growing thousands of kilograms of cannabis in unlicensed rooms in late 2018 and early 2019.

Opinion: Struggle for control at CannTrust drew conflict in to the open, hastening crisis

The troubled cannabis grower has already halted all sales. The two non-compliant ratings leave it with no productive assets that are in compliance with federal regulations while Health Canada mulls whether to suspend its licences.

A facility in British Columbia that CannTrust acquired this year for outdoor cultivation has not yet received a licence. In July, CannTrust said that “if a crop is not planted [at the site] by Aug. 5, 2019, there will be no outdoor harvest in 2019.”

The price of CannTrust shares dropped 27.79 per cent on Monday, although that comes after a jump of nearly 40 per cent in late-day trading on Friday. The company’s share price has fallen 52.9 per cent since July 8, when CannTrust admitted illicit growing activity, raising the possibility that Health Canada could suspend or revoke its licence to grow cannabis.

The sanctions at the Vaughan facility are another black eye for CannTrust, but do not necessarily increase the likelihood that Health Canada will suspend the company’s licence, Graeme Kreindler, an analyst with Eight Capital, said in an interview. If Health Canada decides to suspend the licence, it will likely act based on the more serious regulatory breaches at the Pelham greenhouse, Mr. Kreindler said.

“This is just another indication that in terms of what was going on at the organization, this type of situation was pervasive, and it’s not just isolated to the grow facility,” he said.

Over the past month, CannTrust has fired chief executive officer Peter Aceto and forced chairman Eric Paul to resign. It is under investigation by Health Canada and the Ontario Securities Commission, and has hired the Canadian arm of U.S. investment bank Greenhill & Co. to conduct a “strategic review” that is exploring a possible sale of the company or its assets.

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On Friday, CannTrust’s auditor, KPMG LLP, said it is withdrawing its audits of the company’s recent financial statements after receiving “newly uncovered information."

The latest non-compliant rating was issued after the market closed on Friday. As far back as November, 2018, CannTrust officials had expressed concerns about Health Canada uncovering regulatory breaches at the Vaughan facility, internal CannTrust correspondence shows.

After a Health Canada inspection of the Pelham facility in November, Graham Lee, CannTrust’s director of quality and compliance, wrote an e-mail to other CannTrust officials, including Mr. Aceto and Mr. Paul, outlining problems at the Pelham and Vaughan facilities.

“There are several points of exposure in our business we need to consider. I would not be surprised if HC visits Vaughan in the near future and that could compound HC’s concerns,” Mr. Lee wrote.

“We are storing product in the Mother Room at Vaughan,” he wrote, referring to a room where cannabis plants are grown for cloning purposes rather than harvested. He added that the company had also moved equipment for creating oil capsules into areas that had not yet been licensed.

The 60,000-square-foot Vaughan manufacturing site was originally CannTrust’s main growing facility, but has been largely repurposed into lab space for cannabis oil extraction and warehouse space for processing and packaging. As of December, 2018, 311 employees worked there, more than at the greenhouse in Pelham.

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Along with its licence, the fate of CannTrust’s inventory is up in the air. The company produced 12,700 kilograms of cannabis, worth tens of millions of dollars, in the unlicensed rooms. Several analysts have suggested Health Canada will force CannTrust to destroy this inventory, which could compound the nationwide shortage of legal cannabis.

“From Health Canada’s standpoint, they’re embarrassed," Greg McLeish, an analyst with Mackie Research, said in an interview. “You’ve got what was thought to be a very reputable, well-run company that had a very significant patient base on the medical side, come out there in non-compliance, and I think Health Canada is trying to save face here.”

CannTrust said Health Canada has not indicated how long its investigation will take. The company’s interim CEO, Robert Marcovitch, said in a statement that CannTrust “will take whatever remedial steps are necessary to bring the company into full regulatory compliance as quickly as possible.”

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