CannTrust Holdings announced yesterday that Health Canada is investigating compliance violations at its manufacturing facility in Vaughan, Ontario. The company’s board of directors has initiated an internal investigation to determine the root cause of the problem and to initiate remediation steps. Investor’s reacted negatively to this news causing the stock price to collapse.
The company’s credibility is in tatters as news emerges from the internal investigations that are being performed as a result of compliance violations that were revealed in July.
On Friday, the company announced that KPMG was withdrawing audits from 2018 and the first quarter of 2019. KPMG’s decision was driven by the information revealed from the company’s Special Committee’s investigation as well as information that caused the firing of CEO, Peter Aceto, at the end of July.
The company also indicated that it was unclear what impact the Health Canada investigations would have on the value of its inventory and biological assets. In a separate announcement, CannTrust revealed that it will not sell or ship product from the Vaughan, Ontario facility until Health Canada’s investigation has concluded.
Health Canada’s most recent investigation shows significant compliance violations and a lack of internal controls. The company failed to obtain appropriate regulatory approval prior to making changes to its operating procedures and to the facility. The regulator also found that the firm’s operating procedures did not meet the regulatory requirements.
CannTrust is facing a serious situation that may result in the company’s sale, or even worse, shuttering. So, what are the lessons that CannTrust can provide to the cannabis industry?
1) Shareholders do not easily forgive. It is easy for shareholders to sue a company over a lost investment. Like any relationship, investors must trust that senior management will protect them. News of a regulatory violation may indicate that the company is playing fast and loose, which puts the company and its assets at risk. Investors that do not trust a company or senior management will sell the stock to protect as much of their investment as possible. Investors value honesty and information that can be relied upon.
2) Good governance can save your company. Everyone needs a boss including the CEO. The board of directors is charged with protecting investor interests by being fully engaged and keeping an eye on the big picture. The board must monitor high risk areas such as financial reporting and regulatory compliance for anomalies or other warning signs. By including independent board members, a company can demonstrate to investors that it values a fresh eye on the company to ensure that it has adequate controls and a culture of compliance.
3) Create a culture of compliance. A culture of compliance is worth its weight in gold. Culture can help a company mitigate the risk associated with internal threats posed by employees. Employees must be supervised and trained on the risks facing the company and how the employee’s actions can either exacerbate or mitigate this risk. A rogue senior management team can cause fast and loose practices to leach through an organization leading to the failures witnessed at CannTrust. Investors want a culture of compliance that will protect their investment.
4) Test, test, test. Companies must test operating procedures and controls to make sure they work. Operating procedures are designed to instruct employees on how the business is operated in a way that mitigates risk. By reducing risk, a company can ensure it maintains the value of its inventory and services and provides trustworthy financial statements. Companies that periodically test the controls and processes that are used in the operating procedures can demonstrate their effectiveness of the control framework to the board of directors and regulators.
5) A penny saved may cause a company to be lost. Recent news reports reflect a growing impatience by investors on the return on investment of the cannabis industry. Company’s that cut costs associated with maintaining effective controls and compliance will not be rewarded. As with CannTrust, companies that do not take good governance seriously will simply go away.