In an unfortunate turn of events on Tuesday, Canntrust (CTST) was halted on the TSX and the NYSE as the company filed for creditor protection. CTST announced that they had obtained an order from the Ontario Superior Court of Justice granting protection under the Companies’ Creditors Arrangement Act (CCAA). Due to this grant, all creditors of CannTrust, CannTrust Inc., CTI Holdings (Osoyoos) Inc., and Elmcliffe Investments Inc., will be halted from proceeding with their claims. 

In a statement from CTST the company said, “After reviewing a number of options, CTST’s Board of Directors determined that commencing CCAA proceedings is in the company’s best interests. The company hopes to exit CCAA protection well-positioned to rebuild its stakeholders’ trust and deliver high-quality, innovative products to its patients and customers.”

CTST also said that without its cannabis licenses, it has been unable to generate any “meaningful revenue” since June 2019. Health Canada has also left the company completely in the dark as to whether they will be able to get their license reinstated and this has dragged CTST down completely. 

CTST said that due to having filed for protection under the CCAA, its stock will soon be delisted from trading on both exchanges. The company also anticipates that Canadian provincial securities regulators will issue a cease trade order to prevent any trading in its stock in Canada.

The Initial Order from the Ontario Supreme Court provides for a stay of proceedings in favor of the Applicants for an initial period of 10 days. This is subject to such extensions as the Court may subsequently order, and the appointment of Ernst & Young Inc. as Monitor in the CCAA proceedings.

The Supreme Court has granted a stay of proceedings that will allow CannTrust 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.

It looks like our skepticism has proved true for CannTrust.  On Monday of this week, we wrote about our concern that Health Canada’s response to the COVID-19 pandemic could negatively impact the timing of the company’s compliance efforts.  And we also warned investors Canntrust was a highly risky investment and suggested to proceed with caution.

At this point, the fate of the company still lies in the hands of Health Canada and as of right now, things are not looking good. It may just take a miracle for Canntrust to come back after this news and this might be the first large-cap dually listed licensed producer to fall to this harsh environment. 

(Disclosure: The author is long CTST)

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CTST shares were trading at $0.64 per share on Wednesday afternoon, down $0.06 (-9.12%). Year-to-date, CTST has declined -30.98%, versus a -22.39% rise in the benchmark S&P 500 index during the same period.

About the Author: Aaron Missere

Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...

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