August 12, 2019 / 12:00 PM / 2 months ago

UPDATE 3-Pot producer CannTrust hit by new Health Canada violations

(Adds analyst comment, updates shares)

By Arundhati Sarkar and Taru Jain

Aug 12 (Reuters) - Health Canada has found fault with cannabis production at a second CannTrust Holdings Inc facility, a month after the regulator froze sales of several tonnes of marijuana grown at another one of its Ontario operations.

Shares of the Canadian grower have fallen about 55% over a month after it suspended sales, fired its chief executive officer, disclosed a regulatory investigation and said its results may have to be restated. On Monday, it was down another 21.4%.

CannTrust said it had accepted the health regulator’s latest findings into the Vaughan facility in Ontario, which received a non-compliant rating, and expects to propose a remediation plan to Health Canada.

Interim CEO Robert Marcovitch said CannTrust “will take whatever remedial steps necessary” as quickly as possible.

Health Canada’s rating for the Vaughan plant was based on an inspection between July 10 and July 16. The regulator noted that five rooms, converted from operational areas, were used for storage since June 2018 without prior approval by the regulator.

The regulator also found that two new areas were constructed without prior approval and that security as well as quality assurance investigations were inadequate at the facility, while operating procedures did not to meet requirements.

CannTrust said the regulator also found that documents and information were not retained in a manner to enable Health Canada complete its audit in a timely manner.

Last month, CannTrust said Health Canada had placed on hold about 5,200 kilograms of dried cannabis harvested in five unlicensed rooms in Pelham. In addition, CannTrust has instituted a voluntary hold of approximately 7,500kg of dried cannabis equivalent at its Vaughan manufacturing facility that was produced in the previously unlicensed rooms.

Earlier this month, CannTrust valued the affected inventory and biological assets at about C$51 million as of June 30, but cautioned that there was significant uncertainty related to potential impact of pending regulatory decisions.

Since Health Canada found the unlicensed pot cultivation, CannTrust fired Peter Aceto as chief executive officer, while Eric Paul resigned as chairman.

CannTrust, which is being investigated by the Ontario Securities Commission, has also delayed its second-quarter and six-month results and has said it may have to restate some of its historical financial statements.

The company is also exploring options, including a sale.

However, Cormark Securities analyst Jesse Pytlak expects a sale to be delayed.

“Any potential buyer would want a high level of certainty with respect to the outcome of some of these issues before committing to a purchase.” (Reporting by Arundhati Sarkar and Taru Jain in Bengaluru; Editing by Bernard Orr and Shailesh Kuber)

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