CannTrust would use fake walls to hide the Health Canada jar

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Additional reports from Cannabis Professional

CannTrust Holdings Inc. has hidden thousands of cannabis plants behind temporary walls to stage misleading photographs of a growing unlicensed room that were sent to Health Canada, says a former CannTrust employee.

Cannabis producer Vaughan, based in Ontario, is under investigation by Health Canada after federal regulators discovered that CannTrust was growing cannabis in five unlicensed rooms in its greenhouse in Pelham, Ontario, between October 2018 and March. The announcement has sent the NYT-listed shares of CannTrust to a 36% decline since Monday.

According to Nick Lalonde, who worked for the company from June 2017 to May 2019 and who headed the Pelham greenhouse disposal operations, CannTrust has taken explicit steps to hide its unauthorized operations from Health Canada.

The story continues under the publicity

On at least one occasion last fall, employees were asked to stay late to install fake walls to hide "thousands of plants" from view, in order to take photographs that had been ordered by Health Canada as part of the requirements of routine licensing, Mr. Lalonde told The Globe and Mail.

On Monday, CannTrust confirmed that Health Canada issued an order of non-compliance to the company and blocked the freezing of 5,200 kilograms of product that had been grown in the five unlicensed rooms between October and March; the five rooms were subsequently authorized in April.

The company also claimed that it is voluntarily withholding another 7,500 kg of product from the sale that was grown in unlicensed rooms in the same time period.

Health Canada's ongoing investigations have raised questions among analysts that federal regulators could take the step of suspending the CannTrust license. Twice in the last year, federal regulators have suspended the licenses of cannabis companies for illegal activities.

CannTrust acknowledged on Monday that employees provided "inaccurate information" to regulators.

Mr. Lalonde said that the order to stage misleading photos comes from a person in charge of operations in the greenhouse; he said he does not know if the order came from higher up the management chain. Mr. Lalonde said he participated directly in the staging of a misleading photograph last fall.

"We are hanging these poly walls, these white and polygonal walls … moving tables with hundreds of plants on them from the camera's view, just to take a picture of the room with nothing," said Lalonde.

The story continues under the publicity

"Health Canada has requested images of the ranges (greenhouse rooms) to give the license and permission; they wanted to see the images of the complete range and function properly without plants, because it was not a licensed room at the time," he said. Lalonde.

On June 14, shortly after he left CannTrust for a job outside the cannabis industry, Mr. Lalonde sent an e-mail – reviewed this week by The Globe – to Health Canada officials who outline the ; activity presumed to have taken place at the company.

"If you look through the camera footage before the dates on which the photos were taken and requested them, you will clearly see us hanging up white and poly walls to cover thousands of plants," wrote Mr. Lalonde to Health Canada.

Two days later, Health Canada visited the CannTrust facility, conducted interviews with employees and requested documentation from the company. On 3 July, Health Canada issued its non-compliance order.

"CannTrust acknowledged the results of the Health Canada report, focusing on two key global issues identified by Health Canada and which we are taking very seriously – the first is that we were growing up in unlicensed rooms and the second group of observances involves employees who have provided inaccurate information to Health Canada inspectors, "the company said in an e-mail response to questions from The Globe.

"For example, some of these cases revolved around information provided about unlicensed growth rooms and our documentation practices. We take these observations very seriously and are working closely with Health Canada and our internal teams to implement new processes and a company requalification program.

The story continues under the publicity

"As CannTrust announced at the beginning of this week, we owe our complete response to Health Canada regarding specific details and responsibilities. This is the road to compliance. Until then we are unable to comment on specific details or the actions of current or previous employees, "The company wrote.

A company spokesman said CEO Peter Aceto is not available for an interview on Wednesday. The company also refused to answer a question about whether Mr. Aceto and other executives knew that the plants were growing in unlicensed rooms.

On Monday, in an interview with The Globe, Aceto refused to say what, if anything, he or other executives knew of the growing activity in unlicensed rooms, stating only that CannTrust was "doing an analysis of the root causes to understand exactly who knew what, when "and that one unnamed employee had been fired.

At the company's last earnings request in May, Aceto, former CEO of Tangerine Bank, joined CannTrust in October, advertised the significant increase in production recorded in the previous quarter.

"First of all, with respect to the increase in production capacity, CannTrust recorded a record of over 9,400 kilograms of production in the first quarter from our perpetual greenhouse of the harvest. This is a 96% increase compared to the fourth quarter of 2018 "This increase in production is the result of our investment in people, training and facilities," Aceto said.

The consequences of Monday's announcement on the order of non-compliance and the freezing of sales were dramatic, particularly for a company that was widely regarded as one of the most sophisticated operators in the industry.

The story continues under the publicity

On Wednesday, the Ontario Cannabis Store (OCS), the province's wholesaler and online retailer, decided to temporarily stop selling CannTrust products.

"Due to the temporary closure of Health Canada on certain Cannabust Cannabis products, OCS voluntarily removed all affected products from the distribution pending the outcome of the investigation," said OCS communications director Daffyd Roderick in a note.

The Alberta Gaming, Liquor and Cannabis Commission also announced that "it is putting the affected lots on hold (CannTrust) while Health Canada conducts its investigations".

Royal Bank of Canada analyst Douglas Miehm cut his CannTrust price target from $ 13 to $ 5, while Bank of Montreal analyst Tamy Chen cut his target from $ 11 to $ 6 The Bank of America analyst Christopher Carey lowered the two stocks of stock from "buy" to "underperform" and lowered his price target from $ 9 to $ 4.50.

While conducting his investigation – which should end on July 17 – Health Canada is allowing CannTrust to continue production at its two Ontario facilities, including the five rooms in the middle of the order of non-compliance. CannTrust has also been authorized to continue selling products that are not part of the temporary sales block.

Related professional reports on Cannabis:

CannTrust dives as the company faces scarcity after Health Canada says the pot maker broke the rules

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