Shares of Vaughan, Ont. -based cannabis producer CannTrust are falling in Monday premarket trading after the company disclosed a non-compliance order it received from Health Canada for its Pelham cultivation facility, forcing the company to delay releasing thousands of kilograms worth of inventory.
On July 8, 2019, CannTrust announced that its greenhouse facility in Pelham, Ontario, was audited by Health Canada and found to be "non-compliant".
Health Canada says it made an unannounced inspection of the facility that resulted in an overall non-compliant rating.
CannTrust is a federally regulated licensed producer of medical and recreational cannabis in Canada.
Canadian regulators slapped the firm with the warning after they found that growing of cannabis took place in five unlicensed rooms in the firm's Pelham, Ontario facility, dubbed the Niagara Perpetual Harvest Facility.
The regulator placed a hold on about 5,200 kilograms of dried cannabis that were harvested in the rooms, while CannTrust also put voluntary hold on 7,500 kg of cannabis equivalents inventory that was produced in those rooms.
Health Canada is conducting quality checks on those products, the company said, with results expected within the next two weeks.
At the moment, it's unclear whether there will be other legal actions taken against the company.
"Ultimately this will tarnish the relationship between CannTrust and Health Canada".
Aceto told the Financial Post that some product from the unlicensed rooms was shipped to provincial partners for sale.
US -listed CannTrust Holdings (NYSE: CTST) tumbled over 22 percent on Monday after the company admitted that Canadian regulators had seized its cannabis after discovering it was growing weed in unlicensed facilities.
Investor John Mastromattei, who keeps a close eye on the cannabis sector but doesn't now own any CannTrust shares, says the move is a major hit to the company's reputation.
Canaccord Genuity analyst Derek Dley said the breach of regulations will likely impact its upcoming quarterly results in a material way.
However, Dley added that it believes this is a "one-time issue" and the company is "working diligently to ensure it can rectify the situation". Jefferies analyst Ryan Tomkins said the company had been disappointing in terms of its execution.
"They will have to go to the open market to fill the shortage gap with little bargaining power, which means they could pay inflated prices or take inferior product which could lead to lost market share", he said in a note to clients.
All product sold from the impacted rooms has passed quality control testing at Health Canada certified labs as well as CannTrust's own quality control processes and safety reviews.
The company has also hired Andrea Kirk, for the newly created role of Vice President, Quality.
Note to readers: This is a corrected story.