Bottom Line

Canntrust has officially called it quits on its fight to return to the markets as a legal cannabis grower in its current form.

Canntrust is the first of the 10 largest cannabis license holders to go through a restructuring, but most certainly will not be the last.

What ultimately sank CannTrust were the class action lawsuits, not anything operational.

The wealth of evidence against prior management made this class-action a slam dunk in our opinion and it looks like CannTrust agreed.

Even with enough cash to potentially win their license back in 2021, current management must have realized lawsuits would just bankrupt the company eventually anyway so why bother.

Grizzle has covered the financial mismanagement of the cannabis industry extensively, and we don’t think Canntrust will be the only large LP to go belly up.

Lawsuits forced them to throw in the towel early, but there are at least a few more competitors slowly circling the drain.

Details of the Insolvency Filing

CannTrust Holdings Inc. (TSE: TRST, NYSE: CTST) announced that it has obtained an order from the Ontario Superior Court of Justice granting protection under the Companies’ Creditors Arrangement Act (CCAA).

The CCAA allows insolvent companies (they owe more than they have in cash) to restructure their debts.

This is the same as a bankruptcy proceeding in America and will most likely result in stockholders being completely wiped out.

Under this initial order, CannTrust will be allowed to:

  • Complete the remainder of CannTrust’s remediation plan for its Vaughan Facility without disruption and submit the related evidence package to Health Canada;
  • Continue to work with Health Canada to resolve any remaining Cannabis Act compliance issues, with a view towards reinstating CannTrust’s licenses for its Niagara and Vaughan facilities and restoring operations;
  • Explore a CCAA plan of compromise or arrangement as a means for addressing the multiple putative class actions and other litigation brought against CannTrust in several jurisdictions, seeking to resolve all of the claims and contingent claims against the Company in a single forum; and
  • Facilitate the completion of the Board of Directors’ review of strategic alternatives (the “Strategic Process”), including the solicitation, development and execution of any potential sale or other strategic transaction involving CannTrust, whether in addition to, or as an alternative to, a CCAA plan of compromise or arrangement.

The company still hopes it can find a way out of CCAA protection and return the company to commencing operations, although it remains uncertain if they will be able to do so.

Troubles At CannTrust Began Way Back

CannTrust has been in financial limbo for a long time, long before the Coronavirus outbreak caused our current financial crisis.

Last July, an audit from Health Canada revealed that CannTrust had been growing cannabis in unlicensed facilities and its employees had purposely given false information to Health Canada regulators.

The company was then forced to cease all sales while it was being investigated by Health Canada.

In September 2019, Health Canada decided that it would suspend CannTrust’s licenses, basically a death sentence since the company requires the licenses to generate any meaningful revenue.

In between the initial investigation and the eventual suspension of its licenses, CannTrust was already taking drastic measures to implement change in the company by firing its then-CEO and massive layoffs.

The company also was forced to destroy $77M worth of cannabis inventory due to the fact that it had lost its licenses.

It is safe to say that for the past year, it’s just been one disaster after another for the company.

The company had been unable to generate any meaningful revenues since June 2019, and has not filed any financial reports since the 3 months ended March 31st, 2019.

As of March 20, 2020, CannTrust had a cash balance of approximately $145 million, which may seem like a lot at first, however, the company still needs to get its licenses reinstated by Health Canada before they can begin operations.

Whether or not Health Canada will reinstate CannTrust is still anyone’s guess, and even if the licenses get reinstated immediately, it would still take several months and significant working capital to get the company up and running and to profitability.

The recent crisis caused by the COVID-19 outbreak will only exacerbate CannTrust’s already precarious situation.

Trading of shares of CannTrust has been halted at both the Toronto Stock Exchange as well as the New York Stock Exchange and it is expected that it will be delisted soon from both exchanges as a result of the filing for creditor protection.

 

 

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.