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Aug. 13, 2019, 7:12 a.m. EDT

CannTrust stock slides 26% after regulator says another facility is breaking rules

Canadian cannabis company is already in trouble over illegal cannabis growing at a separate facility

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By Ciara Linnane, MarketWatch


Bloomberg News/Landov
A worker trims flower at a CannTrust plant in Fenwick, Ontario

Troubled Canadian cannabis company CannTrust Holdings Inc. said Monday it has received a report from Health Canada informing it that its manufacturing facility in Vaughan, Ontario, is noncompliant with certain regulations, sending its battered stock down 26% to weigh heavily on the overall sector.

The company /zigman2/quotes/201332942/composite CTST 0.00%  , /zigman2/quotes/206800806/delayed CA:TRST -2.16%  which is already in trouble with the regulator over unlicensed growing at a facility in Pelham, Ontario, said Health Canada found the breaches during a July 10 to 16 inspection.

The regulator found that the Vaughan facility was using rooms converted from operational areas to storage areas since June 2018 without permission; it had constructed two new areas without prior approval, one of which was used to store cannabis; had inadequate security controls at the facility; had inadequate quality assurance investigations and controls; was using standard operating procedures that did not meet requirements under regulations; and was not retaining documents or information in a manner that would allow the regulator to complete its audit in a timely manner.

Don’t miss: Cannabis companies are having a horrible summer as scandals mount and stocks slide

Read now: Short sellers are increasing bets that cannabis stocks will fall

“As previously announced, the company implemented a voluntary hold on the sale and shipment of all cannabis products while Health Canada reviewed its Vaughan, Ontario manufacturing facility,” the company said in a statement. “CannTrust continues to work closely with Health Canada and will provide further details of the hold and other developments as they become available.”

See also: Cannabis stocks sink with broader market as latest bad news from CannTrust weighs

Korey Bauer, portfolio manager of the Cannabis Growth mutual fund /zigman2/quotes/208282024/realtime CANNX -2.98%   launched by Foothill Capital Management, said the news is just the latest blow for CannTrust.

“It’s unfortunate the company continues to disappoint and the negative news continues to pile on,” he said.

Bauer noted that CannTrust stock had enjoyed a major late-day rally on Friday, due to the rebalancing of an exchange-traded fund and short covering, “which to our knowledge looks to be short lived.”

The stock exploded 40% in the last few minutes of trading, after spending the rest of the session in the red.

The company also said Monday that it has prepaid a C$13.3 million ($10 million) mortgage to Meridian Credit Union, which was secured by the Pelham facility.

Health Canada seized five metric tons of the company’s cannabis from that facility in July, when it discovered the illegal grow rooms. Shares have been hammered since then, after media reports found top management knew about the illegal growing and that some of that cannabis had been exported to Denmark, a breach of Canadian drug laws.

The company fired Chief Executive Peter Aceto for cause, and forced President Eric Paul to resign. On Friday, KPMG said it was withdrawing audits for 2018 and the March quarter because the information in them could no longer be relied on. KPMG made the decision after a special committee formed to investigate the Pelham activity shared newly uncovered information.

Read now: KPMG withdraws audits for CannTrust’s 2018 and March quarter after illegal grow scandal

In August, the special committee said it was reviewing options for the company that include a possible sale.

CannTrust shares have fallen 47% in the past three months, while the ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ -2.49%   has fallen 17% and the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.20%  has gained 1.3%.

Bauer said earnings from some big names, including Canopy Growth, the market leader, will set the tone for the rest of the week. Earnings are expected from Tilray, Acreage Holdings, CBD leader Charlotte’s Web and vape and accessories seller Greenlane, among others.

Canopy /zigman2/quotes/200603886/composite CGC -5.41%   /zigman2/quotes/202205609/delayed CA:WEED -5.19%  was down 0.9%, Aurora Cannabis /zigman2/quotes/210559470/composite ACB -4.99% /zigman2/quotes/203734337/delayed CA:ACB -4.97%  was down 1.5%, Tilray /zigman2/quotes/209129655/composite TLRY -6.40%  was down 1.1%, Cronos was down 1.5%, MedMen /zigman2/quotes/201940908/delayed MMNFF -0.82% was down 4%. OrganiGram Holdings’s stock /zigman2/quotes/209289540/lastsale OGI -7.38% was down 2.5%. and Aphria /zigman2/quotes/207425803/composite APHA -1.97%   /zigman2/quotes/205566616/delayed CA:APHA -2.97%  was up 1.4%.

Hexo /zigman2/quotes/206508254/composite HEXO -9.79%  was down 3.3%. Aleafia /zigman2/quotes/203485112/delayed ALEAF +12.20%   /zigman2/quotes/200214885/delayed CA:ALEF +13.58%  was down 2%.

The Horizons Marijuana Life Sciences ETF /zigman2/quotes/208856346/delayed CA:HMMJ -3.15% was down 0.4%. The S&P 500 was down 0.8% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.04%  was down 1%.

Read now: Cannabis industry’s lobbying on track to hit a record

Additional reporting by Max A. Cherney

Cannabis Watch: For all of MarketWatch’s coverage of cannabis companies

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Ciara Linnane is MarketWatch's investing- and corporate-news editor. She is based in New York.

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