CannTrust Holdings (TSX: TRST; NYSE: CTST), a Canadian licensed cannabis producer, has lost over $600 million of market value in the last sixty days. In doing so, it has provided us with an excellent case study on what not to do in a crisis or turnaround.
Some highlights from CannTrust’s action-packed July:
- Following a whistleblower disclosure, they received an audit report from Health Canada, their regulator, observing the growing of cannabis in five unlicensed rooms and inaccurate information provided to the regulator by CannTrust employees. It’s alleged the company built false walls to conceal the illegal grow.
- They acknowledged not having received a permit from Health Canada to grow cannabis on their 81 acre property in BC, Canada, and that if the crop is not planted by August 5, there would be no harvest in 2019, despite previous guidance of 75,000 kgs.
- They put a voluntary hold on all product sales.
- They formed an Independent Committee with a mandate to investigate the illegal grow.
- They were named in three class actions suits.
- They terminated, with cause, CEO Peter Aceto, and replaced with interim CEO, Robert Marcovitch.
- They demanded and received the resignation of Chairman, Eric Paul.
- News broke that Eric Paul and another Director, Mark Litwin, sold $1.0 million of shares on Nov 16, 2018, the same day an internal email referenced the illegal grow. Another $5.0 million of shares were dumped in the next 30 days.
- They announced the appointment of an investment banker to explore strategic alternatives.
- They announced they would not be filing their next quarter’s financial statements on time.
- They announced a securities and police investigation.
That’s a big month and the very definition of a crisis. The focus now should be to save jobs and some shareholder value. But it seems CannTrust is losing that battle.
What should they have done differently?
- The first rule of a turnaround is to understand and admit the problem. All CannTrust’s communications focus on potential quality concerns; not on deceit, fraud, false accounting, a false prospectus, class action suits, liquidity and shareholder value. Those are the issues concerning stakeholders and they should be addressed head on by the company.
- They created an Independent Committee of existing Directors that were also on the Board at the time of the illegal grow. In other words, they are investigating themselves. CannTrust should have appointed an external investigator to build credibility.
- They have focused their response to this crisis on the investigation. That may be helpful in court and with regulators but does nothing for shareholders, patients and other stakeholders. Immediate action should have been taken regardless of the investigation. Primarily, they should have cleaned house by terminating anyone who remotely may have been involved with the illegal activity.
- They should have put together a turnaround team that is experienced and independent of the bad decisions made in the past. Their appointed interim CEO was a Director at the time of the illegal grow and is therefore tainted by this situation, fairly or not.
Want some more detailed discussion? Check out Episode 16 of Martinis With Scott.
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