CannTrust files response to Health Canada, names special committee members

CannTrust’s stock has fallen more than 40 per cent since early July, when it disclosed Health Canada’s findings that the company had grown cannabis in several rooms at its Pelham, Ont. facility. (File Photo: @CannTrust/Twitter)

TORONTO — The fate of CannTrust Holdings Inc. is in Health Canada’s hands after the cannabis company formally responded to the regulator’s finding that it was growing pot illegally at its Ontario greenhouse.

The licensed producer said Monday it officially submitted its response to Health Canada and it awaits the regulator’s response, while an investigation into what transpired by CannTrust’s special committee is “ongoing.”

The federal regulator said it received CannTrust’s response late on July 17 and reviewed it on July 18 and “will thoroughly review the information submitted and will take it into account in its decision making process.”

“Health Canada will not hesitate to take additional action if it feels warranted to protect public health and safety,” said spokesman Andre Gagnon in an emailed statement.

CannTrust’s stock has fallen more than 40 per cent since early July, when it disclosed Health Canada’s findings that the company had grown cannabis in several rooms at its Pelham, Ont. facility. The company said the unlicensed pot growing in question took place between October 2018 and March 2019, before the licences were issued for these five rooms in April 2019.

The regulator has put on hold 5,200 kilograms of CannTrust’s inventory, including some samples that are undergoing testing, and the licensed producer voluntarily put on hold 7,500 kilograms of products linked to the unlicensed rooms.

As well, Health Canada has said that the company provided “false and misleading information” to its inspectors. Former CannTrust employee Nick Lalonde has said he was asked to put up fake walls and obscure unlicensed plants in photos that were submitted to federal regulators.

Health Canada said there are a number of enforcement tools it can use under the Cannabis Act, which include the suspension or cancellation of a federal licence or the issuance of administrative monetary penalties up to $1 million.

However, some CannTrust product that originated from the unlicensed rooms had been sold, including to various government retailers in Canada and to its Danish joint venture partner Stenocare, which has quarantined and blocked from sale five batches of product until regulators complete their probe.

And on July 11, CannTrust put a voluntary hold on all sale and shipments of its cannabis products as a precaution as the investigation continues.

As well, cultivation, sales and exporting of cannabis unless authorized under the Act are criminal activities, the penalties for which range from fines to imprisonment for up to 14 years in prison.

These provisions under Division 1 of the Cannabis Act “are primarily intended to address situations where possession, production, distribution, sale, and import/export of cannabis takes place outside the legal system (for example by unlicensed individuals or organizations),” said Health Canada spokeswoman Tammy Jarbeau in an emailed statement.

It is unclear whether this would apply in the case of CannTrust.

Health Canada said it is law enforcement that has the authority to take action against illegal cannabis activity and “against those who operate outside of the legal framework,” Jarbeau added.

Matt Maurer, a cannabis lawyer with Torkin Manes, said lawmakers’ intention when drafting those provisions of the Cannabis Act was to target illicit market sales and players.

However, if CannTrust or any other company is doing something that is not in accordance with their licence, it may fit the definition, he said.

“In this case, if what turns out to be true is that there were grow rooms that were not licensed then … on a real technical definition, that would be illicit cannabis,” he said.

That being said, whether heavier penalties would be levied will likely depend on the severity of the infraction, Maurer said.

Jumping ahead and growing in rooms before a licence is received is “pretty low on the scale,” he said.

“Was it that they just got a head start, or was there a lot more to it?” Maurer said.

CannTrust on Monday offered more details on its
previously-announced special committee that is investigating what
happened, including naming U.S. sports executive Robert Marcovitch
as its chairman.

Other members of the special committee are board directors Shawna Page, Mark Dawber, and John Kaden.

It added that the committee’s mandate also includes making “recommendations to the Board of Directors regarding any actions to be taken by CannTrust as a result of the investigation, and to assess any impact on the Company’s bio assets, inventory, sales and revenue.”

The special committee “takes these issues very seriously” and it is committed to working with Health Canada to bring CannTrust into compliance, said Marcovitch.

“Although we want to move as quickly as possible, we are mindful of the critical need to be thorough,” said Marcovitch, a board director and former chief executive of K2 Sports.

“We are determined to identify the root causes for all non-compliance issues, to take appropriate actions to address and remediate any issues with the Company’s compliance culture and to restore trust in the Company.”

On Monday, CannTrust shares closed at $3.56 on the Toronto Stock Exchange, down roughly two per cent from Friday’s close of $3.62 and down sharply from $6.46 on July 5, prior to CannTrust’s disclosure.